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Which Way Will the US Federal Reserve Jump?

Interest-Rates / US Bonds Sep 13, 2013 - 11:31 AM GMT

By: Submissions

Interest-Rates Adam Green writes: The next 2-day monthly conference meeting of the US Federal Reserve is scheduled to begin on Tuesday, 17th September. Speculation has now been rampant for months about when the Fed will commence tapering its influential stimulus policies and what impact such actions would have on the financial markets. This article sets out to define the most likely possibilities.

The Fed has now been constantly injecting liquidity into stock markets for the last five years ever since the 2007/2008 crisis. This massive effort has helped propel the US major indices upwards so that they hit historical highs a few months ago. Consequently, any discussion or speculation that the Fed is presently contemplating the reversal of its quantitative easing policies dramatically increases the possibilities of a serious market correction.

Major Stimulus Plan

One of the largest stimulus measures instigated by the Fed was its $85 billion per month asset purchasing program. Specifically, $40 billion was earmarked to buy mortgage-backed securities (MBS) while the other $45B targeted long-term Treasury assets. The recent meetings of the Federal Open Market Committee (FOMC) have been dominated by vigorous debates concerning how long this influential support should be continued and at what pace should it be reduced. The level of these problems is so intense that practically every key Fed member possesses a differing viewpoint.

For example, Ben Bernanke, the Fed President, has issued repeated statements advising that the current stimulus policies will remain fully operative until the US labor market has achieve substantial gains. However, he has not as yet defined precisely what he interprets as sufficient improvement to activate a tapering action. In addition, the regional presidents of the FOMC have also not quantified a benchmark that could be distinctly utilized as a criterion to initiate a slowdown in monetary easing.

The recent release of a spate of better-than-expected US economic indicators has certainly indicated that the US economy is making progress. However, the publication of the US labor report for August took some of the shine of investor optimism. As such, the precise actions that will be instigated by the Fed this month now appear vaguer then they did a few weeks ago.

What will the Fed Debate?

Consequently, the September meeting of the FOMC could well be a pivotal affair as the ideal situation is almost in position to commence reining in stimulus support. Some of the key topics that are most likely to be discussed at this event are the following:
  • When to taper: Is this monthly the optimum time?
  • What should be tapered: MBS, Treasuries or a combination of both?
  • Pace of Tapering: Consistent monthly reductions of small amounts or using larger intervals of increased amounts.

The most important factor that the Fed will assess in devising its future policy decisions will be the state of the US Labor market. As such, the weaker-than-expected US non-farm payroll figure posted for August has certainly taken the steam out advocators promoting early tapering. However, with inflation well under control, the prevalent economic factors may still be sufficient to support such a move.

Market Responses

How will the financial markets react to the Fed decision? If any signal is issued supporting a reduction in monetary easing then you can expect a sharp sell-off in equities. This is because such a decision will be interpreted by investors that the Fed now wants the markets to start standing on their own two feet. In addition, the US Dollar should strengthen considerably against most other major currencies as tapering will limit devaluing influences on the greenback.

In contrast, if the Fed decides to postpone tapering by maintaining its current monetary easing policies in full force, then the stock markets will rally while the US Dollar will weaken. Irrespective of which way the Fed decides to jump, you can expect a surge in volatility levels after an announcement is made on Wednesday 18th September.

This US Federal Reserve analysis article was written by Adam Green, senior editor and financial news writer at

    Copyright © 2013 Adam Green- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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