Around the world, equity markets are in the red. Down by 0.75% about two hours into the U.S. trading day, American International Group (NYSE: AIG ) is no exception. It doesn't take a Wall Street analyst to figure out why.
No easy way to say goodbye
At the end of its two-day meeting yesterday, the Federal Reserve's Open Market Committee released its official statement, followed by chairman Ben Bernanke's unusually clear and clarifying remarks, on the future of quantitative easing and other aspects of U.S. monetary policy. Here's the essence of the Fed's plans:
- The tapering of the $85 billion per month bond-purchase program will begin later this year, so long as the economy continues to improve.
- The program is expected to end entirely by mid 2014, when the Fed projects the unemployment rate to be down around 7%.
- Interest rates will remain low until the unemployment rate drops below 6.5%.
Foolish bottom line
"Our policy is in no way predetermined and will depend on the incoming data and the outlook." That statement from Bernanke ought to calm the markets, but it obviously hasn't. The world is freaking out by mere mention of the fact the bond-purchase program widely believed to be behind the slow-but-steady recovery of the world's biggest economy is slated to someday end.
But it had to happen someday. America's central bank couldn't have kept expanding its balance sheet at the rate it was. The Fed's third round of quantitative easing only began last September, but it feels like it's always been there, even to me. I'm sure that's what everyone else is feeling, as well. So AIG is riding the wave of market fear today. When will that market fear end?
I think the recovery has substantial enough legs to stand at least partially on its own, and that's all the Fed is asking of it. The economy needed the wheelchair of full-on quantitative easing last fall (and apparently still needs it now; it's not going anywhere just yet), but it will soon be able to get by with crutches. Investors will get used to the idea of a world without QE as time passes, and there will bumps and jolts, but companies with strong enough fundamentals will do fine, as they always do.
This is why here at The Motley Fool, we counsel investors to take the long-term view of investing: to tune into the fundamentals of the companies they're invested in, and to tune out market noise. In other words, leave the daily ticker checking to the day traders. Your portfolio will thank you, even if your broker won't.
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