Remember when minutes before the September FOMC announcement everyone was absolutely certain the Fed would announce tapering, only to leave a lot of very angry traders fuming? Fast forward one month when everyone is absolutely certain, again, that there is no way the Fed can announce anything even remotely suggesting a taper. One wonders though: since the Fed has by now burned all credibility bridges, and since the capital market bubble is now far greater than it was when both Stein and Bernanke, implicitly, warned about a building asset bubble (a chorus which has now been joined by JPM, Pimco and BlackRock) in early 2013, would today not be the best opportunity for the Fed to once again stun the market with a dramatic policy U-Turn, just to teach those momentum wave-riding vacuum tubes who is in charge? Probably not. However, as Lloyd Christamas noted, there is a chance. Deutsche Bank's Jim Reid explains why.
So will today's FOMC be as surprising to the market as the September meeting? Almost certainly not but you can't completely rule out a small taper for the following reasons: 1) In the September meeting a large majority of FOMC participants expected the taper to start before December; 2) the fiscal situation has been kicked down the road for a while; 3) financial conditions have arguably eased since the last meeting with rates lower and equities higher and 4) many of the members won't be on the committee into next year and may want to make a statement before leaving; and 5) they may feel a little bruised by the market's verbal reaction last time.
Overall we continue to think the Fed are trapped to a large degree by the liquidity they've provided financial markets over recent years which could destabilise assets if they reversed course without a strong economic recovery. Indeed the current data uncertainties is probably the biggest reason for holding fire at the moment, especially so soon after the shutdown. Indeed our view is that the Fed may have to adjust their criteria for tapering if they want to make regular cuts to QE in 2014. We're not sure how employment is going to suddenly pick up at this relatively mature stage of the cycle.
However when all said and done, the Fed do seem to want to taper and although we think they won't until well into next year, we can't help but think that the Fed are currently unpredictable enough at the moment that we need to be vigilant tonight and indeed in December. The story of the next 6 months could be very little tapering but a swing between liquidity complacency and liquidity fear. Maybe we're veering towards the former at the moment. DB’s Peter Hooper expects today’s FOMC to be most likely a “wait and see event” though he sees the case for a taper now is about as strong as it was in September when it was a very close call.
To all of the above we add one more reason: the following headline from the Chinese Ministry of Commerce, which hit earlier.
- MOFCOM: U.S. POLICY CHANGE MAY CAUSE CAPITAL SWING FOR CHINA.
And so, just like in 2011, China is once again openly complaining about QE (and, tangentially, the inflationary implications it has on the Chinese economy). Recall that it was the soaring Chinese inflation in 2011 that sent gold from roughly where it is now, to all time highs. So if we have a repeat, even as the entire world is now effectively begging Mr. Debtfire to taper, will the BIS' gold selling team headed by Michael Charoze out of Hong Kong be able to contain that one last remnant of the Fed's idiotic monetary policies? Stay tuned.
As for today, our personal hope is no taper now... or ever. After all, the faster the Fed proceeds to monetize everything, and in unlimited amounts, the faster this centrally-planned charade finally ends.