Will the Federal Reserve start tapering its QE this week

Markets hold breath as Fed looks to slow QE

Markets are braced for the US Federal Reserve to start scaling back its $85bn-a-month (£53bn) bond-buying programme this week, a year after the central bank unveiled its third round of quantitative easing in an effort to boost the world’s largest economy.

ben martin By Ben Martin, and Katherine Rushton8:45PM BST 14 Sep 2013 CommentsComments

Some leading analysts expect the Federal Reserve to announce it has decided to slow – or taper – the rate of its monthly asset purchases at the conclusion of a highly anticipated meeting of the bank’s policy-setting committee on Wednesday.
Many expect the central bank to cut QE by about $10bn and, should the decision come this week, it will mark a significant shift in US monetary policy.

Fed chairman Ben Bernanke sent global markets into a tailspin in May when it was first suggested that QE might be slowed this year.

Stock markets around the world fell and government bond yields climbed as investors reacted with alarm to signs the US would start to rein in its economic stimulus.

In London, the benchmark FTSE 100 touched a 13-year high, just before the Fed indicated it could start to slow QE. The index fell when investors took fright at the prospect of tapering.

However, analysts believe that markets have since had enough time to adjust to the change in Fed policy.

“Tapering is coming, if not next week then probably not very long thereafter,” said Douglas McNeill, investment director at Charles Stanley. “Its effects have already started to be seen in the price of securities and the good news is that the roof hasn’t fallen in.”

The Fed has said that American unemployment would have to fall to about 7pc to begin tapering and the jobless rate reached 7.3pc last month, down from 8.1pc when the latest round of QE was launched.

But the most recent data were not as robust as expected – because the number of people looking for a job also decreased along with unemployment – which cast some doubt as to whether tapering will begin this week.

“The balance of evidence in the US in the last month or two has been that Q3 is certainly no better than Q2,” Peel Hunt strategist Ian Williams said of the American economy, adding that it was “questionable” whether tapering was necessary at present.

Nevertheless, HSBC’s chief US economist, Kevin Logan, has pulled his prediction for the timing of tapering forward from December.

He said in a note that the Fed was likely to announce its tapering plans this week, and finally start winding the bond-buying programme back in October, despite the “tepid” nature of the US economic revival.

“We believe concerns about the costs of QE have reached a tipping point [and] tapering will start, even though the economic recovery remains tepid,” he said. He predicted the Fed would reduce its bond-buying programme by $15bn a month in the first instance.

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