Fed's taper opens up big picture for investors The US Federal Reserve was lambasted in September for allowing the market to believe that it would begin reducing its $US85 billion-a-month quantitative easing bond-buying and then doing nothing. But as it turns out, the wait was worth it. When the Fed did launch its QE taper on Thursday morning, investors were finally willing to buy the bigger picture. The Fed meeting that disappointed was held on September 17 and 18. Two days earlier Harvard economist Lawrence Summers had ruled himself out of contention to replace Ben Bernanke as Fed chairman and Washington lawmakers were at odds over the US budget and an extension of America's borrowing limit. Beset by uncertainty inside and outside, the Fed held off. Janet Yellen was nominated by President Barack Obama as Bernanke's successor on October 9, and a 16-day partial closure of the US government ended on October 16. Congress agreed to fund the government until January 15 next year, and suspend the debt ceiling until February 7. Yellen breezed through her confirmation hearings, as the Fed began its meeting this week Democrats and Republicans also agreed on a budget spending blueprint that will set aside the January 15 government funding deadline. The February 7 debt ceiling deadline remains, but there seems to be less appetite for a resumption of hostilities. Economic data including jobs numbers since September have meanwhile been broadly positive. A slowdown in the US that the Fed feared might flow from the government shutdown did not occur. Even given all that, the Fed's confirmation that its QE bond-buying program was being wound back had the potential to undermine the markets. They fell sharply when the prospect was floated in the second quarter of the year, and last month and this month they were still more likely to go down on good economic news than up, on the theory that good news brought the taper closer. Why did the markets soar on Thursday's news that the taper had begun with a $US10 billion haircut? Firstly, because the commencement itself ends uncertainty. Secondly, because Yellen's almost certain confirmation by Congress, the easing of budget tensions in Washington and the flow of solid economic data has done the same thing. Finally, because on Thursday the Fed got its messaging spot-on, in its statement, and in a follow-up news conference by Ben Bernanke. The $US10 billion size of the initial taper was right on market expectations, and the Fed underlined its confidence that the US economy can handle it by slightly improving its forecasts for unemployment in 2014, 2015 and 2016. At the same time, it softened its language about the timing of its Fed rate rises, saying again that rates would not rise while unemployment remained above 6.5 per cent (it was 7 per cent in November, down from a peak of 10 per cent in October 2009) and inflation stayed below 2.5 per cent (it is currently about 1 per cent), but adding that it was likely rates would remain on hold "well past the time" the 6.5 per cent unemployment rate was reached. It also made it clear that rather than being concerned about an outbreak of inflation, it was concerned inflation was too low. Bernanke mentioned three times in his news conference the fact that the unemployment target had been softened, said the pace of the taper was contingent on the economy's ability to handle it, and said 15 of the 17 members of the Fed's rate-setting committee did not see the Fed lifting its benchmark interest rate before 2015. A dozen believe the rate will still be at 1 per cent or less at the end of that year. Where to now? Shares are supported but not supercharged, although they do have a tendency to rally in January. The doveish body language of the Fed's taper is a plus for them, but another big advance probably depends on economic growth and earnings growth that is already priced in being delivered, in the US, here and elsewhere. Fixed interest remains unattractive while official rates stay low, and the $A is weakened, but not significantly. The big hit comes when the Fed actually pushes interest rates up, and that is some way off. All in all, the taper launch is less painful now than it would have been a few months ago.