The Upside of Overreaction

Have markets overreacted to the FOMC's decision to maintain its pace of asset purchases? That depends on what you believe will happen next. In June, Fed Chairman Bernanke suggested that the bond-buying program would be reduced by year-end and terminated by mid- to late-2014 but added that the final decision would be data-dependent.

Although the taper didn't begin in September, as many (including me) anticipated, Bernanke's timeline hasn't been violated. To understand the degree to which markets may have overreacted, consider the following hypothetical scenario. Let's say that the Fed tapers in December, reducing the bond purchase program by a total of $10 billion per month, to $75 billion. The total difference in stimulus between a September and a December taper would be $30 billion dollars over three months....346 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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