For those trading the financial markets, the intentions of the Fed with regard to the future of its programme of quantitative easing has not been far out of mind ever since Ben Bernanke revealed back in May that the central bank was considering a reduction in stimulus if the economy continued to improve. This week has seen the question of will they or won’t they taper nibbling away at investor confidence.
The answer to the question of will they taper is: of course they will – just maybe not until next year. Enough people have started to think that a taper is on the cards for next Wednesday that the Dow and the S&P 500 are on track for a second weekly decline in a row, despite a limited rebound in stock prices today.
With just over half an hour to the close in New York, the Dow Jones was up 0.33% at 15,790 and the S&P 500 had gained 0.20% to 1779.2. Despite the level of uncertainty heading into next week’s monetary policy decision, volatility has remained fairly contained, suggesting that while the market may not like the idea of the tap being tightened, no-one is panicking about it.
I think that’s a sensible response: even if the Fed does make a surprise reduction in stimulus, it is overwhelmingly likely to be only a modest decrease. That would mean that even with a taper, the economy would continue to enjoy a sizeable amount of stimulus, alongside benevolent developments such as the two-year Federal budget deal passed by the House of Representatives yesterday that would give a 1% pay rise to Federal employees next year.
This week was fairly thin in terms of economic reports. In comparison, next week is packed full. The focus of attention will be dominated by the FOMC meeting, no doubt, but we have various reports on the housing market and the manufacturing sector, as well as the latest CPI data to look forward to.