The Case For A December Taper Just Got A Whole Lot Stronger

Ben bernanke sign languageREUTERS/Jonathan ErnstA sign language interpreter translates remarks by U.S. Federal Reserve Chairman Ben Bernanke (R) at the National Economists Club annual dinner at the U.S. Chamber of Commerce in Washington, November 19, 2013.

“After a week of surprisingly good economic data and the likelihood of another government shutdown approaching zero, the Federal Reserve will likely taper in December if it sticks to the plan it laid out over the summer,” concluded
Business Insider’s Danny Vinik on November 11.

At the time of Vinik’s analysis, most of Wall Street’s economists were unwilling to forecast a December tapering of the Fed’s $US85 monthly quantitative easing program.

But that sentiment has shifted in the wake of the surprisingly strong November jobs report, the surprisingly strong November retail sales report, and the earlier-than-expected U.S. budget deal.

“It’s still a close call, but chances are now above 50 per cent that the Federal Reserve will modestly reduce its asset purchases later this month,” said Potomac Research Group’s Greg Valliere who was communicating the analysis of former Fed Vice Chair Don Kohn. “There’s a 60-40 chance that the FOMC will decide on Dec. 18 to begin tapering.”

“The final piece of the puzzle may have been yesterday’s solid retail sales data, a sign that the recent improvement in the labour market may finally be producing stronger spending,” he added. “Agreement on a budget deal, eliminating a major source of uncertainty, is another factor supporting a December taper.”

But could the markets handle it?

“I think a few weeks ago investors would have been pretty concerned about the idea of [a December] taper because the data didn’t really give them comfort that the economy was at escape velocity,” said JP Morgan’s Tom Lee. But “with Friday’s jobs report and some of the other ones we’ve had recently, you know I think investors are getting comfortable if it does happen in December.”

The Federal Reserve will conclude its next Federal Open Market Committee (FOMC) meeting and publish its statement at 2:00 p.m. ET on Wednesday, December 18. The consensus among Wall Street’s economists is no taper.

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