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 Will the U.S. central bank now slow the pace of its stimulative bond
buying as the economy's outlook begins to brighten or will it wait,
setting the stage for stock investors' undreamed of gains to keep
going?
Fed policymakers gather for the last time in 2013 for a two-day
meeting that concludes on Wednesday. Many investors are still
expecting the Fed to delay scaling back its $85-billion-a-month bond
buying program until early next year.
But recent developments suggest a December move by the Fed is at
least in the realm of possibilities. Those developments include a
stronger-than-expected November jobs report, a U.S. budget deal in
Washington and the latest signs of tame inflation.
A decision to begin scaling back quantitative easing now is
"potentially the largest factor for the market in the near term,"
said Robert McIver, co-portfolio manager of the Jensen Quality
Growth Fund in Lake Oswego, Oregon.
"The very thought of it has had a very negative reaction in the
market," so a period of consolidation is likely to follow, he said.
Indeed, stocks logged their worst week in nearly four months this
week.
The Fed's ultra-loose money policy, adopted more than four years
ago, has helped lift the Standard & Poor's 500 index 24 percent so
far this year. In an effort to promote economic growth, the Fed has
been buying Treasuries and mortgage-backed bonds to keep long-term
interest rates low.
Stocks temporarily pulled back from their rally this year when Fed
Chairman Ben Bernanke began hinting in May that a reduction in the
stimulus program may be near.
STRONGER JOBS MARKET
Comments by Fed policymakers this week have leaned toward the
central bank being closer to trimming bond purchases. St. Louis Fed
President James Bullard, who is a voting member on the Fed's
policymaking committee, said the Fed could slightly reduce the
purchase program this month after signs of a stronger job market.
Most economists in a Reuters poll this week said they expect Fed
policymakers to defer action until January or March, but the number
of those expecting a Fed move in December has increased compared
with one month ago.
Some stock traders, guarding against a Fed surprise, have been using
options as a hedge against possible losses.
What the Fed will do is still an open question. The central bank
surprised many investors in September when it kept its stimulus in
place.
The S&P 500 is on track to end 2013 with its best yearly gain since
2003, so what the Fed decides could mean the difference between
pulling back or resuming the advance.
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"Once we get the Fed news out of the way next week, I expect the
seasonal factor to kick in and we may see historical highs again
leading up to the new year," said Ryan Detrick, analyst at
Schaeffer's Investment Research in Cincinnati, Ohio.
Some analysts argue investors are making too much out of the issue
of tapering since the Fed is likely to continue its accommodative
measures for many months to come.
LOW RATES PROMISED
Even as it has begun to talk about reducing stimulus, the Fed has
vowed to keep interest rates low for a long time, and most Fed
officials expect no rate hike until 2015.
That means the Fed is likely to be very careful to create a cushion
for the economy, as well as the markets, they said.
"I think people are fibrillating about tapering. Every day they're
looking for a new speck of information about it," said John
Rutledge, chief investment officer of Safanad, a New York-based
private investment firm. "I don't think they will announce anything
next week, and when they do announce tapering, they will take great
pains" to reassure the market.
Several stock market strategists in a Reuters poll released Thursday
said they expected any reduction in its bond buying to be a small
amount initially.
Investors will be keen to hear any comments from the Fed on how long
it is likely to keep rates low.
Given the amount of talk surrounding a Fed tapering, investors could
hardly be in for a punch, analysts said.
"One would expect there would be a knee-jerk reaction," said Eric
Kuby, chief investment officer at North Star Investment Management
Corp. in Chicago. But, "it would be more of a surprise than a
shock."
(Reporting by Caroline Valetkevitch; additional reporting by Angela
Moon; editing by Kenneth Barry)
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