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The end of quantitative easing?

If there is one key takeaway from today’s US macro calendar it’s that US consumers care little that quantitative easing is about to come to an end.

Federal Reserve building
Source: Bloomberg

Consumer confidence rebounded strongly in October, rising to a seven-year high. The better-than-expected print was most likely owing to the decent jobs growth seen recently stateside, as well as expectations that economic growth is on the up.

US treasuries yields fell on the back of the disappointing home prices. Does this imply that the market believes that the FOMC will tighten monetary policy sooner rather than later? I would suggest that this sort of speculation is a little premature. Indeed, the prospect of higher rates does not seem to be a factor at this time.

So while we have seen mini-tantrums in the equity space as the prospect of the punch bowl removal becomes a reality, the recent bounce might actually suggest that the removal of QE is in fact a bullish driver – as long as interest rates remain low for the foreseeable future.

Tomorrow evening marks an important event for all market participants – the FOMC minutes. Market watchers will scurry for clues about interest rate hikes; specifically, the time frame and indeed the extent of a rate hike when it does occur.

What’s significant about this month’s minutes?

While this is a regular event, it does differ this month in that it is expected that the Federal Reserve will announce that it will stay the course as dictated by earlier in 2014 and end its third round of bond buying, otherwise known as QE3.

Having purchased $1.6 trillion in treasuries and MBS since 2012, November will then be the first month in 37 that the Fed will not be buying longer-term securities.

The US central bank is also expected to keep its forward guidance intact that the Fed will wait a ‘considerable time’ before hiking short-term rates.

Credibility is important. There is a fine line between soothing market participants with a dovish outlook and the markets interpreting said dovishness as a fall out from current global growth concerns and disinflationary malaise.

It is widely expected that some reference to persistently low inflation will come up, but while CPI may be below target levels, the main inflation measure – the Core PCE Price Index – stands at 1.5% year on year.

By contrast to other central banks, the FOMC has two mandates; employment and price stability.

Questions around employment

The US added 248,000 jobs last month and the US unemployment rate now stands at 5.9%. Participation rates look a little shabby; 62.7% at its lowest rate since 1978.

So people are dropping out of the workforce and the jury is still out as to why. Some say it’s an expansion of food stamp and disability programmes keeping people out of the labour force. Others would argue that college-goers and a lack of opportunity since the recession has kept would-be labour participants on the side lines.

The weak labour market cannot support many more months in which jobs grow by 200,000 or more, and this trend implies that the FOMC will be loath to tighten too quickly.

Credibility of the Fed

Credibility is also at stake. A large part of the Fed’s policy in recent years was built on communications: setting market expectations via forward guidance. Any deviation from recent forward guidance may well be interpreted as a negative and in some respects would only serve to make the problems facing the eurozone even more severe.

The deteriorating economic picture in Europe would not be helped by a strong euro. Printing more dollars would only send the euro one way – northwards. This would not be conducive to the ECB’s plans.

The FOMC minutes will be released at 6pm GMT Wednesday 29 October

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