September FOMC: Bernanke's Eastern Put

by Michael J. Howell19. September 2013 17:02

The Fed surprised markets by deciding not to start 'tapering' its QE programme at its September meeting. What does this mean? Markets read it bullishly, that the Fed will continue to buy bonds and pump in cash, probably because they sense policy-makers are concerned by recent weak-ish economic numbers. However, whatever the FOMC's internal doubts and debates, the Fed has been striving all year to divide 'forward guidance' on interest rates from 'tapering' of QE, arguing both publically and privately that the former is more important overall and anyway set more in line with economic prospects. Meanwhile, QE is thought to be more important for the finance sector, and some Fed policy-makers have been concerned over recent months by bubbles and a 'reach for yield'. This argues for tapering now. Therefore, the Fed's latest decision is puzzling because if they are concerned about economic growth they could have hinted at lower future 'forward guidance', while still making a token gesture towards some tapering. Something else may be up? This could be EM. July/ August saw a rout in several EM currencies and EM equity and bond markets because of the upcoming threat of tapering. The fragile state of EM may have convinced US policy-makers to hold fire on tapering for another couple of months. So, overall no real change in view. On balance a bit more bullish if the Fed is truly an implicit protector of EM, and on this read the Fed may not be as concerned about the US economy as some fear. Therefore, keep selling those bonds; buy back some dollars and bottom fish in EM. The Bernanke Put may have just shifted Eastwards!

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