Dec 17 (Reuters) – The Federal Reserve probably won’t taper
when it meets this week, though maybe it should.
Financial markets definitely ought to sell off no matter
what the Fed does, but almost certainly they won’t.
The Federal Reserve will announce its interest rate policy
on Wednesday, after which Ben Bernanke will get a chance to
explain why, or why not, they choose to reduce bond purchases.
While less than a fifth of economists polled by Reuters expect
the Fed to taper in December, a recent run of encouraging data
has driven that figure up four-fold in just one month.
By Bernanke’s own three-part test – jobs, economic growth
and inflation – things are not that bad. Employers took on
203,000 extra workers in November, in what is looking like a
trend, and unemployment fell to 7 percent. Manufacturing looks
to be reviving, budget negotiations are less toxic and the
global backdrop is supportive. Only inflation – at 0.7 percent
in October – remains stubbornly below-target.
Indeed from a risk management standpoint, continued bond
buying may carry more potential risks than putative benefits.
On the positive side, quantitative easing had made financing
cheaper, supporting the prices of everything from houses to cars
to art to stocks and bonds. That has helped to repair household
finances, at least for those lucky enough to have wealth and
borrowings in the first place.