Will it, won’t it? Experts predict Fed’s likely move

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.

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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.