Last week I wrote a post about timing the end of QE3. Since that time several Fed officials have spoken publicly about how (not when) that might occur. In particular, Dallas Fed President Richard Fisher and St. Louis Fed President James Bullard have both recently used the phrase "tapering off" in reference to how QE3 will come to a close. In his justification of this tapering off strategy, Richard Fisher said "you can't go from Wild Turkey to cold turkey." So, despite his initial opposition to QE3, he (and presumably his colleagues) understands that QE must be slowly brought to an end so as not to shock the market.
Although the conversation about bringing QE to an end has become increasingly open and we have seen some encouraging signs about the U.S. economy, foreign economic pressures could still alter the trajectory of U.S. monetary policy. In particular, Britain is facing economic stagnation, inflationary pressure is slowing in Europe and lingering questions remain about who will be making decisions at the Bank of Japan.
In his testimony before Parliament, the Bank of England's next leader, Mark Carney, made it clear that although he is open to interventionist monetary policy, he is not inclined to pursue additional quantitative easing so long as British inflation remains above the 2% target. Similarly, he made it extremely clear that he does not intend to redirect the Bank's main policy directive toward nominal GDP targeting. Instead, Carney's testimony suggests that he will pursue a strategy of increased guidance and communication to reassure markets. To some extent, this meager policy change could be seen as a political move to ensure his confirmation, but if Carney holds to this path, the British economy could continue to stagnate for some time.
Just as Bank of England is changing hands, the ECB and the broader European banking community seems to be relatively calm for the first time in years. However, Mario Draghi has signaled that he will defend the Euro to ensure that its value does not rise too high as other currencies continue to decline. This signal coupled with slowing Eurozone inflation caused a brief drop in the Euro this week, highlighting the structural weaknesses that remain in the European banking community.
Perhaps the greatest uncertainty on the global central banking front comes from Asia. The Japanese finance minister has suggested that the Yen's value has fallen too quickly. These comments come just as the Bank of Japan faces major personnel shifts, highlighting the uncertainty about continued Japanese economic stimulus. Moreover, Japan is still in a territorial dispute with both Russia and China about certain islands. Although these disputes have not yet caused a major drain on economic productivity, they have caused several Japanese companies to withdraw operations from China. Nevertheless, the Chinese economy seems to be consistently growing.
Ultimately, the question is whether continued global uncertainty will create significant enough headwinds to alter the growing consensus that QE3 should taper off in the second half of 2013. The answer is probably no. If anything is going to force the Fed to continue QE into 2014 it will be poor fiscal policy as a result of failure to compromise in Washington. This means that investors should expect QE3 to taper off at the tail end of 2013, but be aware that fiscal and international headwinds could alter that timeline. Regardless of when it ends, investors should look to continued QE as a stable force in a world of arbitrage opportunities based on relative strength of currencies and fact that the ECB seems willing to ensure the Euro does not climb too high.