For the last three months on Wall Street, the most important guessing game has been -- when will the Fed reduce quantitative easing (QE) and by how much? The guessing game started immediately after the Fed's Open Market Committee (FOMC) last quarterly meeting, when Bernanke used a press conference to telegraph their intention to "take the punch bowl away from the party." The stock market promptly threw a "taper tantrum," losing around 500 points in the Dow, as nobody really knows how dependent the bull market has been on QE; thus increasing uncertainty.
The FOMC's quarterly meeting begins today. Tomorrow, they are expected to end this guessing game. The stronger the economy, the more likely they are to reduce QE. Recent economic data has been mixed as usual -- but mostly positive.
The weaker inflation, the more likely they are to reduce QE. Inflation data released just this morning show inflation weaker than expected.
Bernanke's term ends in January, and he wants to begin the tapering before he leaves. He seems to feel he got us into QE and would like to start getting us out. (Of course, if the economy weakens afterwards, they have promised to increase the amount of QE at that time.)
The stock market has already priced in the decision that the Fed will being tapering this month by $10 billion eacg month, with 75% of that decrease in the amount of Treasury bonds they buy in each month and 25% of that decrease in the amount of mortgage-backed-bonds. This ratio allows them to start weaning off Treasury faster than the housing market, where mortgage credit still retains a stranglehold on the home market.
If the FOMC delays tapering, I expect the market to rally. If they taper more than $10 billion a month, I expect the market to weaken.
Then, the most important guessing game will be . . . what will the FOMC announce after their next quarterly meeting? And, another fat lady will have to sing then.
It also shows how difficult it is, when the government is such a huge player in the economy, for the stock market to function like a stock market, which worries mostly about company earnings instead of monetary policy. While I think Bernanke did a heroic job of preventing an actual depression, I'll be happy when they are finished saving the world. Maybe, we can then get back to the textbook stock market we have studied for so many years.
The FOMC's quarterly meeting begins today. Tomorrow, they are expected to end this guessing game. The stronger the economy, the more likely they are to reduce QE. Recent economic data has been mixed as usual -- but mostly positive.
The weaker inflation, the more likely they are to reduce QE. Inflation data released just this morning show inflation weaker than expected.
Bernanke's term ends in January, and he wants to begin the tapering before he leaves. He seems to feel he got us into QE and would like to start getting us out. (Of course, if the economy weakens afterwards, they have promised to increase the amount of QE at that time.)
The stock market has already priced in the decision that the Fed will being tapering this month by $10 billion eacg month, with 75% of that decrease in the amount of Treasury bonds they buy in each month and 25% of that decrease in the amount of mortgage-backed-bonds. This ratio allows them to start weaning off Treasury faster than the housing market, where mortgage credit still retains a stranglehold on the home market.
If the FOMC delays tapering, I expect the market to rally. If they taper more than $10 billion a month, I expect the market to weaken.
Then, the most important guessing game will be . . . what will the FOMC announce after their next quarterly meeting? And, another fat lady will have to sing then.
It also shows how difficult it is, when the government is such a huge player in the economy, for the stock market to function like a stock market, which worries mostly about company earnings instead of monetary policy. While I think Bernanke did a heroic job of preventing an actual depression, I'll be happy when they are finished saving the world. Maybe, we can then get back to the textbook stock market we have studied for so many years.
