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The Fed meeting today and tomorrow will focus on when to taper the $85 billion monthly bond purchasing program known as quantitative easing (QE).
As Money Morning told you yesterday, a lot of people seem to think the Fed will taper this week because the economy is improving and that the economy is strong enough to handle a reduction in its bond buying.
But like we said, this is a "dangerously popular delusion" – as this chart proves…
And we think the Fed won't be able to take its foot off the gas just yet – especially when doing so in the past has triggered a 10% to 15% drop in the markets.
Here's what you need to know about today's Fed meeting and the possibility of a QE taper:
Fed Meeting Today
When Will the Fed Meeting Result be Announced?
The Federal Open Market Committee (FOMC) will announce its decision Wednesday afternoon at 2 p.m.
No one expects the Fed to completely slash its bond-purchasing effort. As Money Morning Chief Investment Strategist Keith Fitz-Gerald told CNBC last week, doing so could lead to a 25% to 50% haircut in the markets.
Ending the bond-buying program would be done in small increments and progress gradually. The Fed would reduce purchases from $85 billion to maybe $80 billion, to $75 billion, and so on, over a series of months.
But structurally, that won't totally ease markets, as the global economy is going to have to learn to walk again without the Federal Reserve as the lead actor in the markets. The Fed could couple its tapering decision with additional verbal guidance on interest rates or inflation in an effort to buffer market uncertainty.
For example, they could reduce bond purchases while extending the interest rate benchmark downward on when they will consider letting interest rates rise (moving from 6.5% to 5.5%).
Has Quantitative Easing Succeeded?
The answer depends on who you are…
QE has been great for the markets. Wealthy Wall Street banks and many investors have had their portfolios boosted by QE over the past two years.
As Legacy Advisors pointed out this fall, there has been a .93 correlation between QE efforts and the price of the S&P 500 since Bernanke's efforts started in 2008. A correlation of 1.00 signals a perfect positive relationship between two unique variables (in this case, market performance and the central bank's buying and borrowing efforts to inject money into the economy).
With capital costs low, many banks took cheap money and invested in emerging markets and other high-yield investments, including junk bonds, which reached a record in 2013.
But corporate profits and investor returns are not the true measuring stick for any Fed success. What really matters is the macro-economy, including the central economic metrics to a nation like unemployment, consumer spending, and business investment levels, among others.
On paper, these numbers have shown considerable improvement in the last few months, driving optimism over the possibility that the U.S. economy can stand on its own with less hand-holding from the Federal Reserve.
But as we explain below, those figures on paper are not all they appear to be…