The initial questions for the FOMC are: will the Fed taper or not? And how much? Yet the focus will shift quickly to the next steps the Fed will take. The biggest question is: when will QE end?
In the dramatic press conference in June, Bernanke said that the Fed may end QE entirely by mid 2014 after tapering may start later in the year. Bernanke left this message to the press conference, after the statement. We might get a clearer direction for the markets only then.
Update:
Needless to say, any future decision depends on future data, and all the Fed’s forward guidance is data dependent. But, the tentative intentions have an immediate impact on the markets.
Shifting the timeline?
The Fed initially made a pledge to keep interest rates low until mid 2013 back in 2011. Since then, it shifted the target again and again, and finally abandoned the timeline for qualitative guidelines: 6.5% unemployment rate as long as inflation expectations remain under 2.5%.
In June, Bernanke’s tentative target for tapering QE was a year away. Mid 2014 is only 9 months away. If Bernanke will not talk about ending QE at some potential time, he will surely by asked about it by the reporters.
- Basically, if Bernanke sticks to “mid 2014”, we could certainly see the dollar surging and stocks falling.
- If Bernanke mentions another date or leaves the question unanswered, we could certainly see the opposite reaction: the dollar falling and stocks surging.
For a full preview of the upcoming FOMC decision, including the background, the different scenarios and reactions of different currencies (which may certainly differ), see the QE tapering preview.
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