We don’t know of anyone who thinks the Federal Reserve will announce a tapering of its quantitative easing program today at the conclusion of its October FOMC meeting.
However, Deutsche Bank strategist Jim Reid offers five reasons why you can’t completely rule out such a move this morning in a note to clients:
So will today’s FOMC be as surprising to the market as the September meeting? Almost certainly not but you can’t completely rule out a small taper for the following reasons: 1) In the September meeting a large majority of FOMC participants expected the taper to start before December; 2) the fiscal situation has been kicked down the road for a while; 3) financial conditions have arguably eased since the last meeting with rates lower and equities higher and 4) many of the members won’t be on the committee into next year and may want to make a statement before leaving; and 5) they may feel a little bruised by the market’s verbal reaction last time.
Overall we continue to think the Fed are trapped to a large degree by the liquidity they’ve provided financial markets over recent years which could destabilise assets if they reversed course without a strong economic recovery. Indeed the current data uncertainties is probably the biggest reason for holding fire at the moment, especially so soon after the shutdown. Indeed our view is that the Fed may have to adjust their criteria for tapering if they want to make regular cuts to QE in 2014. We’re not sure how employment is going to suddenly pick up at this relatively mature stage of the cycle.
However when all said and done, the Fed do seem to want to taper and although we think they won’t until well into next year, we can’t help but think that the Fed are currently unpredictable enough at the moment that we need to be vigilant tonight and indeed in December. The story of the next 6 months could be very little tapering but a swing between liquidity complacency and liquidity fear. Maybe we’re veering towards the former at the moment. DB’s Peter Hooper expects today’s FOMC to be most likely a “wait and see event” though he sees the case for a taper now is about as strong as it was in September when it was a very close call.
Last week, Mary-Beth Fisher, head of U.S. interest rate strategy at Société Générale, said there is a 10% chance that the FOMC elects to increase QE at this meeting.
Many on Wall Street actually expect the Fed to try to send a dovish statement today, perhaps by tweaking the language surrounding economic conditions to reflect the impact of the government shutdown. Click here for a complete preview »
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