As Bernanke sits in for his last meeting this week, we answered three of the most commonly asked questions our readers have been sending us about today's FOMC meeting and the possible outcomes:
1. Is there any chance the Federal Reserve delays its decision to taper - particularly in the wake of the market sell-off on Friday and Monday, and problems in emerging markets?
Friday's market sell-off doesn't mean the Fed will definitely throw up the white flag here - at least not yet. The Fed governors aren't likely to panic after a 3% to 4% pullback after a 31% market rally in S&P 500 in 2013.
Taper is still the plan - for now. Although that doesn't mean it should be (or that there should have been this much stimulus to begin with, but that's another story).
Whether or not the Fed will increase the taper is unclear. Officials may agree to another $10 billion taper (from the current $75 billion bond buying per month). That keeps the Fed on pace with its first reduction in December, and puts us down to $65 billion per month until the next go round.
Now, for some, that isn't enough. Dallas Fed President Richard Fisher wants $20 billion in taper today. This shows a real desire to get out of the program.
But any taper decision out of the Fed meeting today will have little to do with what's happening in emerging markets like Argentina and Turkey.
The emerging market chaos is not the problem of the Federal Reserve - investors (read: banks and fund managers) decided to take the Fed's cheap money and put it in riskier assets. These countries believed that money would flow there forever, without a need to reform their economies. Then the investors took that money out at the first big sign of problems and put it back into the United States.
On the interest rate side, the answers lie in the Fed meetings from December.
Whether it's Yellen or Bernanke in charge, the job market remains the primary focus. Meeting notes from December say the Fed will hold the line on the fund rate target at 0 to 0.25% until "well past the time the unemployment rate declines below 6.5%." That means the rate will stay in place until at least 2015 and tapering ends.
2. Is there anything that could make the Federal Reserve change its mind on tapering?
As Money Morning Chief Investment Strategist Keith Fitz-Gerald said Tuesday, recent economic data does not justify a taper, which could mean a change in 2014 as Yellen plays the hand she was dealt.
"We will see Yellen re-engage the printing presses, even if she calls the 'innovative' market actions she's supported something other than stimulus later this year," said Fitz-Gerald.
One of the biggest numbers that could trigger a Yellen taper: jobs.
The Fed's responsibility is its policies' impact on domestic unemployment levels and inflation. A string of worsening jobs reports would give Yellen reason to engage in some kind of "stimulus."
For that reason, the next important date here after Janet Yellen's arrival this Saturday is next Friday, when the Labor Department releases January's jobs figure.
If we move into the summer, and the official rate (which is already massaged and manipulated to incredible lengths) is going in the wrong direction, we could hear about new efforts to stimulate more growth (which means we'll be traveling back down the rabbit hole).
3. What else could change with Yellen leading the Fed?
Janet Yellen is likely to follow in Bernanke's footsteps with Keynesian prescriptions to the deep, fundamental problems still plaguing this economy.
There is one notable thing that will haunt Janet Yellen from Bernanke's legacy - and how she navigates it will be her biggest test.
As Chairman, Bernanke fueled a massive borrowing spree that hasn't been noticed by the public because of low interest rates.
But the moment that interest rates start to rise, the Fed's hands are going to be tied, making it harder for Yellen to maneuver.
Right now, interest rates are still low, and will remain so for a few more years, or so Yellen suggests. But if interest rates rise to 5% and we see our federal debt limit strike $20 trillion, the United States will be paying $1 trillion per year in interest on its debt.
Keep in mind that more than $9 trillion in debt, and thus $450 billion a year annually in interest payments, will be tied directly to the Bernanke legacy.
Stay tuned for the FOMC meeting outcome this afternoon.
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