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| Daily News Brief September 18, 2013 |
Top of the Agenda: Markets Await Fed Decision
Markets have traded up in recent days as investors await a decision from the U.S. Federal Reserve on Wednesday on its plan to taper its $85 billion monthly asset purchase program, with analysts expecting a $10 billion monthly reduction (WSJ).
As the Fed's $2 trillion quantitative easing program winds down, the
general public is largely unaware of its existence; a recent poll finds
that only 27 percent of Americans understand the meaning of the unconventional monetary policy measures (Reuters).
Wednesday's decision is expected to spark a surge in trading as
investors make adjustments to their portfolios, and could help banks
recover from a slump in trading activity this summer (Bloomberg).
Analysis
"The
August jobs numbers were slightly weaker than the market consensus
expectation, but the fall in the unemployment rate to 7.3% was one the
Fed had in June not actually expected to see until the fourth quarter…
The bottom line is that if an imminent Fed taper is misguided… it is not misguided because of the August jobs report," CFR Senior Fellow Benn Steil and Analyst Dinah Walker write in a blog post.
"Given the realities of the tepid economy and the range of policy uncertainties… the Fed would be well advised to start small—e.g.,
a $10-$15 billion reduction in monthly purchases. It would be best if
the reduction falls disproportionately on U.S. Treasuries, thus favoring
for now the purchase of MBS (mortgage-backed securities) to support a
housing market that is already showing some early signs of weakening,"
writes Mohamed El-Erian in Fortune.
"The symbolic effect is huge. A taper would signal the passing of 'peak QE' in the world's largest economy.
Although it is always possible that the economy will weaken, and the
Fed will pick up its pace of asset buying again, that is less likely now
the economic recovery is four years old and the unemployment rate down
to 7.3 per cent.," Robin Harding writes in the Financial Times.
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