Will the FOMC announce that they are to begin tapering their monthly bond-purchases today or not? At some point they will have to beginning tightening monetary policy as the endless supply of artificially cheap money would have negative consequences for the US economy.
The FOMC has been meeting for the last two days and at 19:00 (London) the outcome of the meeting will be announced to the markets. Speculation and front running of the expected tapering has engrossed traders for the last few months, primarily effecting EMFX, the USD and precious metals. The expectation of tapering has led to a significant weakening in EMFX, and volatility (but an overall weakening) in Gold.
The timing of tapering has been the primary talking point for analysts and market commentators, with the main themes being;
-Would the September meeting be too soon?
-Is the US economy stable enough to begin withdrawing stimulus?
-What is a manageable and sustainable pace to taper?
The key policy announcements at 19:00 are will the FOMC have voted that it is now appropriate to begin reducing the current levels of stimulus, and if so; by what amount. The general consensus is that there will be a small reduction with estimates ranging from $5-20bn, though there are a few outliers who believe that today is too soon, and the Fed will not announce any tapering.
The premise for tapering is based on the improvement in the US economy, primarily the decrease in unemployment. There are some that believe the September meeting is too soon, and today will evolve the current caveats for forward guidance, potentially adjusting the current variables.
Following the decision of the FOMC, there will be a press conference with Chairman Ben Bernanke. This is likely to be as vital as the initial announcement, setting the tone and subsequent timeframe of how the Fed will move forward from today.
Doing the FOMC math: 5 doves - Bernanke, Yellen, Dudley, Evans, Bullard - out of 11 voters. Could be a close call...— Jamie McGeever (@ReutersJamie) September 18, 2013
Press Conference at 19:30 (London)
Previous press conferences have at times contradicted the accompanying statements, reversing initial market moves at the announcement. The wording and tone of Bernanke will be key, and will be a significant part of how markets react today.
How the markets are likely to react?
There are various scenarios, due to the multitude of potential variables and how the market is currently positioned prior to the announcement. One of the trades has been a pull from EMFX and precious metals as investors believe tapering will affect these assets.
Personally I believe the market is positioned for a taper of $10bn, will the accompanying statement and press conference being relatively cautious. This would allow the timeframe of future tapering to vary as to the speed of the recover.
The announcement, statement and press conference are likely to lead to considerable volatility as investors position themselves accordingly.
Best of luck, as the markets have been focused on today’s announcement for some time, which should emphasize the importance of the event.
Please note that the above is for information only. Abshire-Smith is an execution only brokerage, and trading decisions should be based on personal research and understanding. If you are unsure please contact an independent financial advisor.