First Take: Fed gives markets little to cheer

Despite recent signs of weakness, the Federal Reserve thinks that the economy is growing strongly enough for it to trim its bond-buying program by $10 billion, to $65 billion a month, the Fed said Wednesday.

Your mileage may vary, however.

The Fed started to taper its bond purchases, which are designed to keep long-term rates low, in December. Low long-term rates help borrowers, particularly mortgage borrowers, to refinance loans or take out new mortgages at affordable rates. In theory, as the economy starts to gain momentum, markets will no longer need the Fed pushing long-term rates lower than they would normally be.

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But the economy is by no means up and dancing, despite the efforts of outgoing chairman Ben Bernanke. Tuesday's report from the Conference Board on its Consumer Confidence Index, a good leading indicator of the economy, showed a rise from December's levels, but it's still well below its average for recovery periods from 2003-2007 and 1997 to 2000. And Tuesday's report on durable goods – big-ticket items expected to last a long time -- was also a disappointment. Wages are stagnant, and employment remains stubbornly high.

For that reason – and because fourth-quarter corporate earnings have seen some big misses, most notably from Apple and Yahoo – financial markets aren't likely to cheer the Fed's decision to take its foot gently off the monetary accelerator. Tapering simply means the Fed isn't adding money to the system as it was before. It's not taking money out of the system.

That's unlikely to happen this year. The Fed probably will not nudge its key short-term fed funds rate, now at zero to 0.25%, until 2015, when the unemployment rate is expected to fall below 6.5%.

For savers, that means another 12 months of negative returns, when adjusted for inflation, which has gained 1.5% for the 12 months ended December. And for! stock investors, who have grown used to "taper tantrums" when the Fed slows down its market-friendly easing, Wednesday's announcement could mean more rocky sessions ahead.

Bond yields fell on the news, which mainly reflects worries about turmoil in emerging markets, particularly Turkey and South Africa, which have raised rates recently.

"Emerging markets weakness is driving the ship right now," says Anthony Valeri, Investment Strategist for LPL Financial. "But the economy is doing well, and rates should track higher. This could be a good selling opportunity for bonds."