A look towards today's Fed meeting

In what is a busy week for economy watchers and traders, it is perhaps today’s US Federal Reserve meeting that stands out as the most important event. 

What must be remembered is that, like everyone else, the Fed has to wait and watch for US economic data. Today has already been a busy day on that front, with ADP numbers, Q2 GDP figures and GDP revisions from the Bureau of Economic Analysis coming through. The ADP figure was positive, seeing 200,000 jobs added in July versus an expected 180,000, while GDP growth for the second-quarter was a not unimpressive 1.8%. However, the previous quarter’s growth was revised down to 1.1%.

Speculation continues

In other words, we are not much better informed about how the Fed will play the tapering game in the autumn than before, though the general consensus appears to be that we will see a change in policy in September. UBS, the Swiss investment bank, has argued that the ninth month of the year will see this change, as the regional Fed chairmen return to Washington armed with new economic estimates. With this new information, participants on the Federal Open Market Committee will be able to gauge how their staff economists view the state of the US economy.

However, there is still the possibility that we won’t see any change until later in the year. If tonight’s statement seems to lean towards that outcome then we could see yet another surge higher for equity markets. Traders might be learning to live with (but certainly not love) the taper, but if they think that the reckoning is going to be delayed by a few months then they will take the opportunity to run successful trades for a while longer.

A new chairman

There is one final element that needs to be factored into the mix; that of the change in chairman. One possible front runner, Janet Yellen, is widely seen as being more dovish than others, and her presence could slow any further tapering in 2014, if indeed it does start at the end of this year. Meanwhile, Larry Summers is viewed as something more of a hawk, who might look to press on with tapering at a higher pace.

In the end, we must just wait and see. It does seem that the arcane art of central bank watching is certainly not dead, with the era of activist central banks being far from over.

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