Experts have predicted the Federal Reserve will be unlikely to reduce the amount of bonds it buys as part of its support scheme for the world’s largest economy.
The Fed, chaired by Ben Bernanke, launched the third round of its quantitative easing programme in September 2012 when it started buying $40bn (£24.5bn) worth of mortgage-backed securities and increased this to $85bn a month in December 2012 by also buying $45bn of government bonds monthly.
The programme has been a boon for markets, which have reacted negatively at any hint the support would be reduced.
This was most visible during summer this year when Mr Bernanke suggested the Fed could start to reduce the amount of bonds it buys which sent stockmarkets tumbling.
However bourses then rallied again in September when Mr Bernanke announced the Fed would delay the decision to reduce the size of the programme, something which has become known as tapering.
The September decision caught markets by surprise but came just before the US government enacted a 16-day partial shutdown when Republicans and Democrats failed to agree a budget.
However, attention has now turned to the Federal Open Markets Committee meeting which takes place today and tomorrow and experts appear to be leaning towards the Fed not taking action.
Joshua McCallum, senior fixed income economist at UBS Global Asset Management, said he did not expect the Fed to taper this week.
“The reason is that to offset tapering it wants to offer stronger forward guidance but I don’t think the committee has agreed how to do that,” he said.
“It may also be inappropriate for the committee to actually change forward guidance before the composition of the committee changes.”
Mr McCallum added recent economic data had been “interupted” by the government shutdown meaning the Fed may want to wait to have clearer data before deciding to reduce quantitative easing.
However, the economist said speculation had been picking up in markets that the Fed would hold a press conference after every FOMC meeting instead of every few times. The Fed will hold a press conference this week but not again until March.
“If this week there is an announcement that they will do a press conference after every meeting which is a rumour at the moment I think that makes January more likely,” he said.
Peter Dixon, global equities economist at Commerzbank, said: “It is a close call but on balance I do not think the Fed will taper tomorrow, primarily because the inflation picture is such that the Fed might want to wait a bit.
“Inflation is low so Ben Bernanke may want to leave it a little longer until inflation picks up.”
Neptune’s chief economist James Dowey said he did not expect the Fed to taper this week.
“The data is not telling the Fed to taper at this meeting,” he said.
“The hawks point out that payroll numbers are running at 200,000 per month which is good progress but there is a long way to go yet. Also 7.3 per cent unemployment is high and it flatters the labour market.
“The labour market is not as happy as 7.3 per cent unemployment would normally imply.”
Mr Dowey added inflation was just 1 per cent - a figure he called “worryingly low” and said the personal consumption expenditures was down at 0.7 per cent and “trending down”.
Mr Dowey added the broad consensus in markets remained for a March taper.
Royal London Asset Management economist Ian Kernohan agreed with Mr Dowey.
“Inflation is so low there is no particular need to rush,” he said.
“Also, markets are very thin in terms of the level of trading volume so it will probably be best to wait until the new year.
“A surprise decision now could lead to a bigger reaction in markets than it otherwise would have done.”
But Simon Ward, chief economist at Henderson Global Investors, said he expected the Fed to take action to reduce the size of its bond purchasing programme.
“I think this because the labour market has improved significantly and unemployment is now down to 7 per cent, which was the level that Ben Bernanke mentioned in the summer as the terminal value for quantitative easing,” he said.
“It will look rather foolish if the Fed does nothing and it would cast doubt on its forward guidance in other respects. It will try to combine it with something to persuade the markets that rates will remain low for a long time.”
Peter Hensman, global strategist at Newton, said he expected the Fed to reduce the size of its asset purchases at this week’s meeting although any change would be “at the smaller rather than larger end”.
“It seems like the Fed wants to start making this move even if it is not 100 per cent confident this is the right thing to do,” he said.
“A big reason for not starting to taper in September was the political uncertainty surrounding the government shutdown and debt ceiling negotiations.
“While some of that exists, the continued reasonable economic data and small reduction in political uncertainty probably enables them do so something.”
Mr Hensman added that a key feature of this week’s meeting was the press conference following the decision - something which would not happen at the January meeting.
“They will release a statement in January but when you have the opportunity to speak for 45 minutes you can clearly lay out why the decision has been made now,” he said.
He added the Fed would be keen to make sure a move to taper bond purchases would not be seen by the market as a sign interest rates would be raised.
David Lebovitz, global market strategist at JPMorgan Asset Management, said he expected the Fed would announce its decision to taper this week.
Mr Lebovitz said the reduction of quantative easing was a long-term positive for the economy adding the Fed would not withdraw support until it was confident the economy could “stand on its own two feet”.
“When the open-ended asset purchase programme was introduced at the beginning of 2013, the Fed indicated that this policy would remain in place until labour markets had improved substantially; a year later, the unemployment rate has fallen from 7.8 per cent to 7 per cent and 2.3m payroll jobs have been added,” he said.
The strategist added Mr Bernanke had previously said as part of the Fed’s forward guidance policy it would reduce its bond buying if aspects of the economy improved.
“In June, Mr Bernanke stated that under a scenario where labour markets improved, growth accelerated, inflation rose and fiscal headwinds diminished, a reduction in bond purchases would begin later this year," he said.
“Outside of a rise in inflation, these criteria have been met; this begs the question of what the Fed will do this week, as if forward guidance is going to be effective, the central bank providing it needs to be seen as credible.”
