Fed mulls stimulus tapering in 2014
December 10, 2013, 7:23 am

Speculation of Fed tapering has boosted US markets and strengthened the dollar against the Yen [Getty Images]

The unemployment rate – at its lowest since 2008 – in addition to data pointing to the highest consumer confidence level since the October Federal Shutdown, indicates that the economy may be wobbling it’s way firmly out of recession and into more stable recovery.

When the Fed’s policy-making Open Market Committee (FOMC) meets next week for the last time in 2013, it is likely to find that economic indicators have significantly improved to meet the conditions established by outgoing Fed Chief Ben Bernanke who said that the stimulus programme – known as quantitative easing – should be eased or terminated when unemployment reaches 7 per cent.

In May, Bernanke announced that the US was on the verge of ending its quantitative easing programme. His statement led to significant devaluation of currencies and flight of foreign capital in emerging markets.

In statements made to Congress on July 18, Bernanke said that the end to monetary easing could come in mid-2014.

However, at a closely watched meeting in September, the Fed surprised markets by voting to continue the stimulus package. It voted the same way in October, citing that the US economy was not yet strong enough to endure such a subtraction of monies from markets.

White House nominee for Federal Reserve Chief Janet Yellen said at her confirmation hearing that “It’s important not to remove support, especially when the recovery is fragile and the tools available to monetary policy should the economy falter are limited”.

But Federal Reserve Bank of St. Louis and FOMC member President James Bullard sees higher chances of tapering in lieu of favourable market indicators.

“A small taper might recognise labor-market improvement while still providing the committee the opportunity to carefully monitor inflation during the first half of 2014. Should inflation not return toward target, the committee could pause tapering at subsequent meetings,” Bullard said in remarks carried by the media on Monday.

His comments added to the positive unemployment figures almost immediately affected money markets around the world. In Japan, the Yen weakened to its lowest level against the dollar in seven months. In Canada, the dollar fell to a three-year low against the greenback.

Latin American and emerging markets are particularly vulnerable to the Fed’s likely tapering.

When the Fed began its quantitative easing programme by buying back bonds at higher prices, the ‘extra’ cash found its way to emerging markets as investments. Now, with the likelihood of the Fed tapering in 2014, the extra money will exit these markets, which will be unable to sustain the loss and in turn, suffer currency devaluation.

Source: Agencies