Dollars and Sense: Long-awaited Fed changes announced

The Fed speaks. The big news this week was the decision by the Federal

Reserve to begin tapering its bond purchases. It was a mild surprise that the announcement came just before Christmas. Specifically, the Fed announced that it would buy only $75 billion a month in bonds rather than the current $85 billion. The move was seen as a vote of confidence in the economy, and it sent stocks upward. The markets were relieved that the taper was slight. The Fed split the reduction in asset purchases evenly between Treasury and mortgage-backed securities. It will now purchase $40 billion per month of Treasurys, down from $45 billion, and $35 billion of mortgage-related securities, down from $40 billion. The Fed added that it has no plans to raise short-term interest rates, saying it plans to maintain current rates “well past the time that the unemployment rate declines below 6.5 percent.”

Signs of life. This week we got a report that consumer prices were unchanged in November. They’ve increased just 1.2 percent in the past 12 months, pushing down inflation worries. We also got some good news from the manufacturing sector. Aerospace giant Boeing announced it was boosting its dividend by 50 percent and buying back $10 billion worth of shares in the next two to three years. Materials company 3M said it would increase its dividend by nearly 35 percent.

Factories rising. Manufacturing has been a bright spot throughout the recovery, which is interesting since for years the sector has been heading offshore. But conditions overseas and improvements here are causing U.S. manufacturing to compete again. U.S. factories increased output in November for the fourth straight month, led by a surge in auto production, which was up 3.4 percent. Overall, manufacturing for the first time surpassed the pre-recession peak set in December 2007, the month the Great Recession began. Output is now 21 percent above its recession low in June 2009.

Employment still sluggish. Despite the good news, the employment picture is still spotty. On Thursday, the Labor Department said the number of people seeking unemployment benefits rose 10,000 last week to 379,000. That level is the highest level since March. It’s likely, though, that this weekly report, which tends to be up-and-down anyway, reflects increased volatility because of reporting issues related to the Thanksgiving holidays. While unemployment remains high, it is trending downward.

The week ahead. Wall Street should be quiet this week since most people will take off work for the holiday, but look for plenty of activity on Main Street. Because both Christmas and New Year’s Day fall in the middle of the week this year, we’re beginning four days of mostly uninterrupted shopping time before Christmas Day. Lots of people are taking off all of next week, too, so look for movie theaters, restaurants, and airlines to do booming business in the week ahead. Most analysts are expecting the economy to finish the year strong.