FOMC Meeting Today: Why the Fed Won't Taper

Email
    Text size

Fed-watchers are pretty sure they know what the word on a Fed taper will be when the official announcement comes following the Federal Open Market Committee (FOMC) meeting today and tomorrow (Wednesday)...

Wait a while longer.

While the U.S. Federal Reserve has hinted several times in the past six months that it is considering cutting back on its monthly purchase of $85 billion in bonds and mortgage-backed securities (known as quantitative easing, or QE), most expect no Fed taper in the immediate future.

It just doesn't make sense.

This FOMC meeting will be Chairman Ben Bernanke's last before turning the keys over to current vice chair Janet Yellen. Any significant shifts in policy are unlikely until the transition is complete.

And the Fed historically has resisted making any disruptive policy moves in December, as they know trading is winding down for the year.

Beyond that, the Federal Reserve has said the timing and scale of any tapering depends on the health of the U.S. economy and whether inflation and unemployment are where the Fed wants them to be.

On that score, unemployment has improved to 7% (the Fed has said it would like to see it fall to 6.5%), and there's been a pop in the gross domestic product numbers to 3.6% as well as better November retail sales.

But inflation remains below the Fed target of 2%. The consumer price index (CPI) is 1.2%, and the measure the Fed prefers, the personal consumption expenditures index, is just 0.7%.

All that said, a Bank of America Merrill Lynch survey of fund managers showed a paltry 11% expect a QE taper from the FOMC meeting today.

So if the Fed begs off a QE taper this week, when might we see it?

In the survey of fund managers, 32% expected a January taper and 42% expected a March taper.

But given Yellen's extremely dovish views, the Fed taper may be much farther into the future...

Special Report: When the market gets volatile, you can score triple-digit gains from this trading tool... Here's how to get started today, for free.

Looking Beyond the FOMC Meeting Today

Money Morning Chief Investment Strategist Keith Fitz-Gerald is very skeptical that soon-to-be-Chairwoman Yellen will have much interest in tapering.

In fact, he says, any hiccups in the U.S. economy could actually cause Yellen to press down harder on the QE gas pedal.

"Yellen is likely to increase stimulus by mid-2014," Fitz-Gerald said. "I'm not sure Yellen even knows how to spell T-A-P-E-R."

when qe ends

Given how addicted the stock markets have been to QE - Fitz-Gerald says most of the 155% in gains we've had since March 2009 are due to the Fed's "stimulus" - cutting back even a little won't be easy.

"The Fed cannot stop printing money now that it's got the entire world addicted to it like a two-bit junkie," he said. "They may want to wind down behind closed doors, but in reality they can't."

And as long as the QE keeps flowing, it's likely the markets will keep rising.

Fitz-Gerald also disagrees with the notion that the U.S. economy is strong enough to withstand a QE taper, especially given how dependent the markets have become on it.

"Nothing could be farther from the truth. Any amount of stimulus reduction will indeed trigger a 'taper tantrum,'" he said.

That means whenever a Fed taper does come - and even with Yellen running the show, it will have to happen eventually - it will hit the markets hard.

Investors need to keep a very close eye on the Federal Reserve in the months ahead, Fitz-Gerald said, as they've "boxed themselves into a corner" and could pursue even riskier options.

That means investors need to be prepared for just about anything the Fed might do, no matter what comes out of the FOMC meeting today. Here's what Fitz-Gerald says investors need to do now...

Related Articles: