Saturday, April 13, 2024
Homemarket insider'Helicopter Ben' expected to keep Fed tapering at final meeting

‘Helicopter Ben’ expected to keep Fed tapering at final meeting

The Fed is expected to move forward with a $10 billion taper of its bond-buying program, despite market talk that a shakeout in emerging markets could give it pause.

Some Fed watchers do not see the selloff as an issue the Fed will even comment directly on in its 2 p.m. ET statement Wednesday afternoon, though it will likely be discussed by the members of the Federal Open Market Committee.

Emerging markets were rattled again Wednesday after rebounding late Tuesday and early Wednesday on Turkey's surprisingly sharp rate hike. But the magnitude of the hike, nearly 5 percentage points to 12 percent—raised concerns that the increase in rates will hurt the country's economy and defeat the effort to strengthen the currency.

"Now it raises questions about the whole strategy," said Marc Chandler, chief currency strategist at Brown Brothers Harriman. "I think people are saying the Fed may not taper this afternoon." Even so, Chandler said he expects the Fed to announce a second tapering, taking its monthly bond buying to $65 billion, in part because of the momentum in the U.S. economy.

Chandler also said the Fed would lose credibility if it does not taper, and it would also hurt the credibility of next Fed chair Janet Yellen even before she takes on that role.

(Read more: Markets wage war against central banks)

The Fed is expected to cut its quantitative easing program back evenly between mortgages and Treasury securities.

"We expect $10 billion tapering … and $10 billion at each Fed meeting until the Oct. 29 Fed meeting, when the last reduction is expected to take place," said Tony Crescenzi, senior portfolio manager at Pimco.

A CNBC survey showed 87 percent of fund managers surveyed expect the Fed to taper by an average of $9.87 billion at this month's meeting, roughly matching the $10 billion reduction, from $85 billion to $75 billion a month, announced after the December meeting.

Seventy-two percent of the survey's respondents expect the Fed to announce an average $10.65 billion reduction after each of the rest of its meetings this year.

The Fed has said any tapering is dependent on economic and financial conditions, and economists say the Fed has to consider strong momentum in the second half of last year. Fourth-quarter GDP is expected to show more than 3 percent growth when it is reported Thursday.

But the Fed will also be looking at whether the poor December jobs report, a drop in new home sales and this week's surprisingly weak durable goods as well as other data signal a weakening in the economy.

"The threshold for increasing and decreasing the tapering is very high because accelerating tapering would bring forward interest rate hike expectations, and the Fed would almost certainly not want that, especially with inflation low," Crescenzi said. "Reducing the cuts would go against all the reasons the Fed tapered in the first place."

The Fed's statement will also be key for what it says about the economy, and some expect it could comment on possible economic headwinds from the unusual cold and snow across the country.

"Will they take note of the shakiness in the emerging markets?" said Art Cashin, director of floor operations at UBS. "It's a very tricky game. They all universally realize the law of diminished effects has taken over completely, and at the same time they know it's the lucky rabbit's foot to a lot of people. They don't have a press conference, so the wording of that statement has to be carefully honed.

"I think we could get enormous volatility at 2 p.m.," Cashin said.

(Read more: El-Erian: Bernanke's gift to Yellen)

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