The Federal Reserve’s big day is finally here. Expectations that the central bank will announce a $10-$20 billion taper (reduction) in its monthly asset purchases are running high, but what if Chairman Ben Bernanke gets cold feet?
Such a decision would spark a bout of volatility in financial markets, highly undesirable given the fragile state of the recovery in the world’s largest economy, market watchers say.
“Knowing that investors have waited with bated breath for this month’s [Federal Open Market Committee] FOMC meeting, team Bernanke knows that if they fail to manage the market’s expectations properly, they risk triggering a sharp rise in volatility… that could end up threatening the overall recovery,” said Kathy Lien, managing director at BK Asset Management.
“The mere talk of tapering has already sent 10-year yields up a full percentage point and this move was a shock to policymakers around the world,” she added. Ten-year Treasury yields have risen sharply since May, from around 1.6 percent to 2.84 percent currently.
A CNBC survey of 47 economists, money managers and Wall Street strategists found that, on average they expect about $15 billion taper, with far more focus on Treasury purchases than mortgage-backed securities.
The central bank has been buying both assets as part of its most recent quantitative easing program launched in September 2012 aimed at driving down long-term interest rates, lowering unemployment and boosting economic growth.
According to Bill Smith, CEO of SAM Advisors, U.S. bonds yields could head back to 2 percent “really fast” if the Fed does not start to wind down its easy-money policies at Wednesday’s meeting.
A zero taper would “catch people by surprise and the bond market will absolutely rip,” Smith said. “The equity markets would rally on this; it just means more easy money.”
On the currency front, a decision not to taper would trigger U.S. dollar weakness, said Vassili Serebriakov, currency strategist at BNP Paribas. “We would be more comfortable buying the likes of the Australian dollar and the Canadian dollar on this kind of news.”
Signs of softness in the U.S. economy in the recent weeks, including disappointing nonfarm payrolls data for August and a fall in consumer confidence have raised speculation among some investors that the Fed may postpone reducing its monetary stimulus.
Peter Schiff, CEO and chief global strategist of Euro Pacific Capital, still thinks there’s a chance the central bank won’t taper at Wednesday’s meeting.
“Remember the Fed initially talked about an exit strategy, but of course it was lying, it never had an exit strategy. Now it acknowledges it’s not even thinking about exiting, its juts talking about reducing the expansion of its balance sheet,” he added.
Source: CNBC Asia
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