Yellen-led Fed’s view on tapering to be revealed
[dropcap]O[/dropcap]n Feb 1, Janet Yellen will find herself occupying the seat of the most powerful central banker in the world. Having served as the vice chairwoman of the Fed’s board of governors, she has played an instrumental part in implementing the Federal Reserve’s accommodative monetary policy measures via its Quantitative Easing (QE) measures.
But as the American economy heals, the Fed intends to wind down its stimulus programme gradually over time. On Dec 18, the Fed announced a reduction in its monthly purchases of treasury- and mortgage-backed securities by $10 billion to $75 billion a month. The minutes of that meeting will be released during the US trading session. (The Federal Open Market Committee, or FOMC, issues minutes of its meetings with a lag. The minutes of the previous meeting are reported three weeks after the meeting.)
Ben Bernanke’s influence will be limited to just one more Fed meeting and thus it becomes crucial to understand where the other voting members stood on their appetite to taper, and more importantly at what pace they would prefer to scale back in the Federal Reserve’s bond buying programme.The markets have traded sideways so far this year as their is no consensus on whether Yellen would stick to her well-known dovish stance or whether the improving economic conditions will lead to faster-than-expected scaling back of the QE. The dollar index, a weighted average of the dollar against six other major currencies, has been inching higher this week reflecting the currency market traders’ pricing in “a hawkish Yellen”.
Meanwhile, the bond market is reacting in the opposite manner with 10- year bond yields dropping from their year-end highs suggesting bond traders still feel that the Fed will have to back out from its aggressive stance on tapering most probably due to weak data releases on the housing market and the jobless claims front.
The equity market, whose performance can be gauged by the broad-based S&P 500 index, will also most likely show volatile moves as these FOMC minutes are released. At 1842, the S&P 500 is trading at a near all-time high. However, much of this rally has been attributed to multiple expansion and not earnings growth.
Margin stock buying is once again at the pre-crisis levels of 2006-07. Although equity strategists welcome the talk of US tapering on the back of consecutive quarters of above 3 percent GDP growth, only time will tell whether the momentum in equities can be maintained as liquidity is squeezed out the system going forward in 2014.
As of now, we know that Yellen did in fact vote in favour of tapering. Stanley Fischer, former governor of the Bank of Israel and Bernanke’s Ph.D. advisor at MIT, has been nominated for the post of vice chairman to replace Yellen. If his nomination is accepted, yet another hawk would be added to the board of governors.
Today’s data release will provide the much needed direction the markets are looking to put a broader trend in place for the year ahead.
By Vatsal Srivastava