Will the Fed Taper Sooner Than Expected?

“Adieu, Sweet QE, Adieu

The FOMC should (and might) accelerate the pace of QE reductions to $15 billion on Wednesday (June 18th).  Furthermore, at its meeting on July 30th, the FOMC could – and should -announce a similar-sized reduction for the subsequent two months.   Hence, the Fed would not have to wait until its September 17th meeting to announce the final leg. QE would then end two months earlier at the end of August rather than the end of October as markets currently expect.  Such a path would generally afford the FOMC more freedoms, particularly at the September17th press conference meeting.

There are of plenty of reasons to justify such a move:  global interest rates are near historical lows levels; equity markets are at record high levels; the FTSE All-World index closing at an all-time high yesterday; the decade-low in volatility indices; the 6.3% Unemployment Rate; employment gains averaging 250K over the last two months; GDP forecasts for the remaining three quarters of 2014 fluctuating around 3% following the ‘transitory’ Q1 weather-induced slow down; the current lull (or temporary decline) in Ukrainian and Geo-political tensions; and lastly, the ECB accepting the stimulus baton.

Remember, FOMC guidance last year prophesied that QE was expected to come to an end when the unemployment rate hit 7% and the first hike would occur when the rate hit 6.5%.  In regards to this measurement, even the most dovish members have surprised themselves.

The Fed has indicated that it is “not of a pre-set course”.   There are advantages of keeping investors on their toes and having them believe that the FOMC is nimble and flexible.  In addition, it is likely that the Fed does not want to make the same mistakes made from 2004-2006 when it had become too predictable….”

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