Today is important. Day to day statistics about the health of an economy generate volatility, and that is interesting enough, but today is different. I have highlighted before, the fact that western economies need to keep interest rates and inflation low over an extended period of time, to engender a sustained recovery and today`s FOMC will provide evidence of where the Fed believe we stand in that objective.
It has been disturbing for Central Banks to see the behaviour of the long end of the interest rate curve, and no amount of reassurance – including forward guidance – has stopped that from happening around the world.
With this in mind, and emphasising again just how important a low interest 10 year expectation is, I think it will be very difficult for the Fed to be more aggressive than the market expects. The QE drug must be withdrawn – no question – and there is no reason, as the market expects to see that cycle start today, to disappoint. The option to not taper now, having primed the market to reflect only on the size of the withdrawal, would create something of a panic, and Central Bankers are not known for having this as an objective behind policy announcements!
So my guess is that tapering will start, but the rhetoric will be calm and dovish, and designed to reassure markets that the pace of tapering will be gradual – too much at stake not to! Make no mistake there will be much more than the usual analysis on every nuance of the Chairman`s words, and it is going to be very difficult for him to strike the correct line between continued stimulus and related confidence in the economy. Good luck Ben…
