MacroScope

Time to taper the taper talk?

August 20, 2013

It’s been three months since the Federal Reserve first hinted that it’s going to have to ease off on its extraordinary monetary stimulus, but financial markets are still not settled on the matter.

But while volatility is on the rise – surely partly a result of thinned trading volumes during the peak summer vacation season – the consensus around when the Fed will start cutting back hasn’t budged.

That makes endless daily reports from traders linking that to the latest falls in asset prices, particularly U.S. Treasuries and non-U.S. share prices, not terribly convincing.

Reuters has conducted nine separate polls of financial forecasters since Fed Chairman Ben Bernanke dropped his first hint in May. These include economists, and market strategists covering foreign exchange, stock markets and bonds.

All of them have concluded, from the first poll in early June, that September is the most likely month for the Fed to start trimming back its stimulus.

The only thing that has changed is whether they will start by cutting down their $85 billion monthly purchases of U.S. Treasuries and mortgage-backed securities purchases to $70 billion or $65 billion. That’s all.

Minutes to the Fed’s rate-setting committee’s last meeting on policy are due this week and there has been more than the usual amount of talk on trading floors about what they will or won’t reveal.

But nobody is seriously expecting the Fed to back off plans to gradually ease off the accelerator. And the most aggressive forecast out there is for the Fed to end its QE completely by March next year.

That means there are other reasons why financial markets are going through convulsions – and they don’t all have to do with the Fed.

Lena Komileva, head of G+ Economics, describes it this way:

The past week’s bond market rout has all the elements of illiquid, technical and positioning-driven summer markets, and the first rule of survival in illiquid markets is “don’t stand in front of a running train”.

… investors are beginning to appreciate that the recent sharp squeeze in global market liquidity, across both developed and developing markets, has been destabilising and disinflationary, and unlikely to lead to a more hawkish stance by the ECB, the BoE, the BoJ or even the Fed in September.

 

- Additional reporting by Rahul Karunakar in Bangalore

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