The day has finally arrived when the most anticipated event of this year will take place today and tapering talk could possibly will find a pillow to sleep. It has been almost 8 months, that we are almost consistently talking about the Fed and their decision to wind up their ultra loose monetary policy. There is certainly no one to blame for this, because after all it was the Fed who fed this idea to the markets, and the investors are trying to get themselves positioned accordingly.
What we are seeing today is, that even if Fed once again disappoint the markets, investors have certainly positioned themselves for a small amount of tapering. In such scenarios, the fear of disappointment has always been high, because bar already set very high. For instance, market was expecting tapering in September, but the result was no tapering, and the Fed were criticised for their action . Investors certainly misread the Fed then, although, it was James Bullard, St Louis Fed president, who admitted that it was a close call, but the fact was that many were burnt and lashed.
The worst outcome from today’s meeting could be, if the Fed say no tapering and keep their forward guidance to zero. This could certainly push the dollar lower against the basket of currencies, and the equity markets could continue their Stella rally. The message will be simple for the markets that Bernanke is delegating the decision to the next Fed chairwoman, Janet Yellen, known for being dovish. The expectations from her in that case would be to keep the life line for tapering running, but Stanley Fisher Vice chairman, is an extremely hawkish person, may not let this happen that easily.
Our view is that if the Fed truly mean that their decision is data dependent, then the economic data certainly warrant for tapering today, and specially now that the market has once again already priced in a small taper, and a budget deal is already agreed, this could be the best time to test the hot water, by dipping their toe. The US bond is also providing an evidence that a small taper could be announced, because since May this year the US bond yields have soared from 1.8% to 2.8%.