Fed's postponed tapering keeps the markets guessing, again

PHOTO: Fed's postponed tapering keeps the markets guessing, again

The guessing game begins again.

Now that the United States Federal Reserve has passed on the chance to start reducing, or tapering, its bond-buying programme this month, economists and analysts are scrambling to pin down the next likely window.

Fed chairman Ben Bernanke had outlined his tapering timeline in May and June: to trim the monetary stimulus by the end of this year and end it altogether around the middle of next year, when the US unemployment rate was expected to fall to 7 per cent.

Last Wednesday, however, he said the tapering could "possibly" begin this year and that there was no "magic number" for unemployment to act as a signal.

Of course, that hasn't stopped pundits from putting their money on certain dates.

Nine of 17 economists surveyed by Reuters believe the US Fed will taper in December. One tipped tapering to start next month, two said next year, and the rest were still unsure.

Senior Fed official James Bullard said last Friday a small October taper is possible. But economists tip December as more likely.

"The next date for the Fed to start tapering is October although given Mr Bernanke's comments at the meeting, December may be more likely," said Schroders chief economist Keith Wade.

Ms Julia Coronado, a BNP Paribas economist who had correctly tipped that the Fed would not taper last week, said she was still expecting the taper to begin as soon as December, on the back of signs that the US economic recovery is slowly picking up speed.

But December is by no means a foregone conclusion either. Some analysts think the holiday season might skew economic data positively, making it unclear whether the underlying economy has strengthened and prompting the Fed to delay the decision again.

Mr Craig Alexander, chief economist at TD Economics, offers another argument to delay tapering until next year.

"December is a month that the Fed generally does not tighten policy because of year-end financial flows. That kicks the decision into 2014," he told the Financial Post.

Other economic watchers say there is no point in trying to estimate a deadline for tapering, and that markets should study US job figures more closely instead.

Mr Dennis Gartman, an investor who publishes a daily market commentary and had predicted no taper this month, has his eye on the US unemployment rate and new non-farm jobs created.

"We just have to keep an eye... on unemployment and until that number gets below 6.5 per cent, we can expect the Fed to do very little," he said.

He also thinks non-farm payrolls need to hit at least 200,000 - far more than the 169,000 seen last month.

In the coming week, data on US consumer spending, new home sales and jobless claims will shed more light on the current health of the US economy.


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