Janet Yellen makes her first decision as Federal Reserve Chair on March 19th – a meeting that is accompanied by a press conference. How will Yellen perform? Will the language regarding the economy change? Will the 6.5% unemployment threshold be removed? These are open questions. But the question of a third round of QE tapering seems a done deal.
Here are 6 reasons why the Fed is expected to reduce bond buys from $65 billion to $55 billion.
Update: US Dollar breakout inevitable as Investors await FOMC
- Market preparation: Bernanke mentioned tapering in May and in June 2013 and triggered a stormy market reaction. Tighter market conditions were cited for the lack of action in September (no “Septaper”). When the Fed finally announced QE tapering in December 2013, markets were well prepared. From that point onward, the path of QE tapering by $10 each meeting is what the markets expect.
- OK economy: The harsh winter in many parts of the US and perhaps unrelated weakness are not enough to change the big picture: the US continues growing, and this includes jobs. The recent jobs report left little doubt.
- Continuity: Yellen takes over the Fed after 8 turbulent years of Bernanke at the helm. The basic message would be continuity: continuing a policy she took part in forming and she fully agrees with. Bernanke and Yellen see things eye to eye and this includes reducing uncertainty.
- Messages from the Fed: FOMC members are quite communicative. They have different views of the economy or the policy, but the general message they made was clear: barring a major disaster, the Fed is on an almost preset course to taper $10 billion at each meeting. The message became clearer in the recent month or two.
- FOMC voting composition: The composition of the FOMC voting members changes every year. In 2014, the hawks have more representation than in 2013. This small shift adds to the tendency to reduce monetary stimulus.
- Gender: Janet Yellen is the first woman to lead the Federal Reserve. Unfortunately, perfect equality between men and women still doesn’t exist in society. Yellen, which is already considered a dove, might also have to show that she is in control and is tough.
In case the Fed surprises by announcing a bigger taper of $15 billion or no taper, markets will be very surprised.
What do you think? Will Yellen continue the current path or change direction?
Further reading: Will The Dollar Surge In 2014?
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