18 SEPTEMBER 2013
Federal Reserve Tapering Decision Time
This article contribution is written by IG Markets.
Global markets are poised for action, with Ben Bernanke’s press conference this evening fast approaching. The chairman of the Fed’s board of governors faces a difficult decision as he evaluates “tapering” 85 billion dollars of US quantitative easing (QE). Analysts will be closely monitoring breaking news and trends surrounding this release; do keep track of FX movements with IG.
QE by its very nature is a highly debated economic tool. A monetary policy designed to artificially increase money supply through security buying ultimately triggering a surge in lending and financial liquidity. QE essentially drip feeds market confidence into a rattled US economy, and the time has come for the necessary weaning. The beginning of this process marks a bold statement as the Fed addresses the question, is the US strong enough to stand on its own?
A Fragile Balancing Act
Bernanke knows that Fed purchasing cannot be finite, yet the extent of trimming or “tapering” is a fragile balancing act. Too much and volatility could pull the US economy back, too little could construe a lack of confidence in US stability. With the concept of “tapering” already filtered through markets, the Fed will hope initial market shock has already been absorbed. Adding to this positive economic data with house prices rising by 12 percent and unemployment dropping by 7.3 percent, the stage is seemingly set but market reaction is not to be underestimated. The very word “taper” is shrouded in inconsequence with a deliberate avoidance of “diminish” or harsher verbatim. Language will be unable to mask the reality of data as the market reacts to QE change. The financial landscape is all too aware of Newtonian’s philosophy that “every action has an equal and opposite reaction” – the buoyancy instigated by QE has a natural end.
Investors will be finely tuned towards the scale of this change, the tone of the statement and press follow-up, but other structural variables are at play here. US dollar and bond yields may well drift higher as the Euro continues to drop with growing inter-dependency around the controversial EU “bail in” policy – one which is based on high speed recapitalisation using a bank’s own resources. Adding this to the mix volatile currencies across Asia, is hinting a much bigger US dollar rally further down the line. A big scale dollar rally, for an economy with reduced QE support could prove bumpy for the broader US economic outlook.
Ben Bernanke himself has testified that “if the crisis has a single lesson, it is that the too big to fail problem must be solved.” This innate change of attitude towards the “big” institutions like the Federal Reserve continues to fuel a pessimism that could drive volatility and distort Fed reassurance.
This information has been prepared by IG Markets Limited. ABN 84 099 019 851, AFSL 220440. We provide an execution-only service. The material on this page does not contain (and should not be construed as containing) personal financial or investment advice or other recommendations, or an offer of, or solicitation for, a transaction in any financial instrument, or a record of our trading prices. No representation or warranty is given as to the accuracy or completeness of the information. Consequently any person acting on it does so entirely at his or her own risk. The information provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who view it. IG accepts no responsibility for any use that may be made of the comments and for any consequences that result.
Publish date: 18/09/13