6 Dec 2013
Why Fed taper in Dec is a remote possibility?
FXstreet.com (Bali) - The end of Bernanke's tenure at the helm of the Federal Reserve is nearing, and while many pundits and commentators are raising the chances of taper in December, it is very likely that such projections will hit a wall of reality.
The assumption to make if betting for 'no taper' action is that it is no longer in Bernanke's interest to engage in a wind down of QE, that, readers, its a monumental task that Janet Yellen, the nominated new Fed Chairman, will have to face, starting in 2014.
There is no dispute on the argument that two opposite thinking on the same subject make a market, however, for the sake of defending the 'no taper in December' case, let's look at the reasons why the Fed is most likely to stand pat until next year.
While the economy is expected to accelerate next year, there is still a few more politically-poised fiscal battles in January. As a reminder, the uncertainty over the fiscal drag by Washington's political games is what caused the Fed to refrain from tapering back in September.
According to Tim Thielen, Founder at Sea Change: "Data has been trending slightly better recently which has rates creeping higher, leading to the tapering chatter." However, Tim admits the Fed will most likely "hold off just in case there's political issues arising in January", he said.
Another valid point supporting the no taper in December is not just purely based on political issues arising in Washington, but more about a personal decision by Bernake as he ends a mandate as clean as it gets despite criticism and knowing that he has inundated the economy with cheap money - leading to an epic disconnect between stock valuations and reality -, so he will not make a "Harakiri"-type move by tapering the very last month of his term as Chairman.
Lastly, any Bernanke’s first steps towards telegraphing a possible QE exit were met with some wild swings in interest rates, an occurrence that certainly spooked the Fed. Today, with taper talk increasing, the 10-year is pressing against its highs. The resurgence in rates reinforces the case for additional caution as the Fed's worst nightmare is to see a steep rise in rates.
As Tim added: "A close in the 10-year T-Note yield above 2.965% (or 3% for round number fans) - would signify to me that rates are truly trending higher on a macro basis instead of just correcting higher."
The assumption to make if betting for 'no taper' action is that it is no longer in Bernanke's interest to engage in a wind down of QE, that, readers, its a monumental task that Janet Yellen, the nominated new Fed Chairman, will have to face, starting in 2014.
There is no dispute on the argument that two opposite thinking on the same subject make a market, however, for the sake of defending the 'no taper in December' case, let's look at the reasons why the Fed is most likely to stand pat until next year.
While the economy is expected to accelerate next year, there is still a few more politically-poised fiscal battles in January. As a reminder, the uncertainty over the fiscal drag by Washington's political games is what caused the Fed to refrain from tapering back in September.
According to Tim Thielen, Founder at Sea Change: "Data has been trending slightly better recently which has rates creeping higher, leading to the tapering chatter." However, Tim admits the Fed will most likely "hold off just in case there's political issues arising in January", he said.
Another valid point supporting the no taper in December is not just purely based on political issues arising in Washington, but more about a personal decision by Bernake as he ends a mandate as clean as it gets despite criticism and knowing that he has inundated the economy with cheap money - leading to an epic disconnect between stock valuations and reality -, so he will not make a "Harakiri"-type move by tapering the very last month of his term as Chairman.
Lastly, any Bernanke’s first steps towards telegraphing a possible QE exit were met with some wild swings in interest rates, an occurrence that certainly spooked the Fed. Today, with taper talk increasing, the 10-year is pressing against its highs. The resurgence in rates reinforces the case for additional caution as the Fed's worst nightmare is to see a steep rise in rates.
As Tim added: "A close in the 10-year T-Note yield above 2.965% (or 3% for round number fans) - would signify to me that rates are truly trending higher on a macro basis instead of just correcting higher."