Is Fed ready to begin taper? Markets say yes
By Paul Handley, AFPWASHINGTON -- Is the Federal Reserve ready to put the Great Recession behind it? Is the U.S. economy prepared for it?
September 16, 2013, 12:03 am TWN
The markets think so, as the Fed's policy board prepares to meet on Tuesday and Wednesday to decide a momentous step: whether they begin cutting back its stimulus for the economy, US$85 billion a month pumped in via bond purchases to fuel the engine.
Four months after Fed Chairman Ben Bernanke first suggested that the central bank could start to taper its stimulus program, called quantitative easing (QE), sometime this year, most expectations are that the Federal Open Market Committee (FOMC) will take the step.
And with Bernanke expected to step down at the end of January, many believe he needs to set the policy path now, rather than having it delayed for months until his successor settles into the job.
The prospect of less easy money from the Fed has already taken US stocks down from their all-time highs, and sent market interest rates climbing sharply. The yield on the benchmark 10-year Treasury bond has nearly doubled in four months, from 1.6 percent to 3.0 percent.
The anticipation has also wreaked havoc in emerging markets.
A pullout of foreign capital, driven by falling returns, turned into a flood outward when U.S. bond yields rose. That sent authorities in countries like Indonesia, India and Turkey into a panic over their plummeting currencies.
And although that has drawn warnings to the Fed from around the world to not act too precipitously, analysts say the only question surrounding the taper is when, and how fast.
In his effort to remove any obscurity from Fed communications — to make sure that everyone understands clearly what FOMC members are thinking — Bernanke has set the course firmly to taper.
On May 22 he told a congressional hearing that the Fed could begin cutting the QE bond purchases “in the next few meetings” of the FOMC, while adding the condition, “If we see continued improvement, and we have confidence that that is going to be sustained.”
Three weeks later he was more precise, saying the cutback could start “later this year” and be completely wound up by mid-2014.
But by July he was more cautious, voicing a worry over how government spending cuts might slow the economy through the rest of the year.