Investors waiting on the FOMC-Meeting this week, but what will they do?
After the beginning of July, when the speculation began, the Fed could reduce its program to purchase bonds in September, partly negative data from the U.S. economy in recent weeks, analysts and investors are worried about, that the Fed is already prepared to take this step.The final decision can not be predicted with certainty, but we venture a prediction.
Economic growth since early year
When the Fed started the program earlier this year, it was stated that this remains active until the economy shows steady growth, and the Jobless Claims fell to 7.0%. The interest rates could be increased if 6.5% is reached and an inflation rate of 2% or more is seen in the long term.
If we now look back at the past eight months, there is basically a positive trend over the period observed. The unemploymnet rate in January was at 7.8% and has dropped to 7.3% currently. While this is only half the way down to the desired 7.0%, but the labor market is on the right track.
The economic growth in the United States had come at the end of 2012 to a virtual standstill. Although currently we can not speak of a booming economy, but the last beige book shows moderate growth and there are no visible signs that this trend threatens to tip over.
The further development indicates tapering
If we now take a look the data on forecast of further development, an upcoming tapering is indeed quite likely, but it could also be that the Fed waits for the further development until December so as not to prematurely send a wrong impulse in the economy. But exactly this further development is it, which makes a further delay appears to be little sense. Due to the demographic development, the total employment will be reduced, and thus the unemployment rate, even at a weak to moderate growth, faster than expected decline and can reach the targeted 7.0% in the first quarter of 2014.
Here, now would be the point reached at which the Fed program, in their own words, completely finish. But this would have the same effect as if you remove a sick patient on the road to recovery all medications in the mere hope he will be without this healthy. Alone the shock of removal medications his will worsen the patient's condition. The only safe way is a gradual weaning.
The first step will be a small
The Fed is aware of the consequences, of a too long putting off the tapering, fully aware. If they do not want to be shok the market by an abrupt termination of purchasing, they have to start early with reducing. If they wait until the requirements for a complete stop are reached, and then, in order to dampen the negative consequences, do not follow their own statements, the confidence in the Fed would suffer severely.
Overall, a first step to stop the program is the logical consequence of the past and expected development. Only the length of this step will be shorter than it was originally assumed. The sum of the purchases will probably be reduced by 10 billion dollars a month. This will put a signal that the markets can not hope for a lasting almost unlimited support from the Fed, and the possible negative effects will be limited.
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