Today, the release of the Fed's Open Market Committee Meeting is an important day in the markets' wall of worry. For market analysts, the report will make for interesting reading, but we wonder if anticipation of the market response is not over-exaggerated.
For those traders and markets who have been benefiting from the $85B monthly cash stipend, this is indeed a very important day. Taper analysis has become a daily market chore, but taper does not imply that the monthly cash injection will stop cold turkey. Taper would imply a modest reduction, not the abrupt end of the monthly cash injections. Would the addition of a mere $75B, down from the current $85B, really matter?
And what choices does the Fed really have? There is a mandate to stimulate the economy and reduce the unemployment rate. To accomplish this, the first rule should be that the Fed does no harm. This should further be accomplished without giving the markets any nasty surprises. The Fed must therefore give the market clues of what they might do.
The Fed is sensitive to the impact of their activity on the economy and the markets. Considering this, how can the Fed suddenly turn into Scrooge, the week before Christmas, and announce the beginning of the taper is imminent. The hype about today's report may be just that.
Part of the US economy's listless recovery would seem to be the conflict between the monetary stimulus and other Washington policies. The current rate of deficit spending, about $700B per year, according to Keynesian theory, should be more than enough to get the economy soaring once more.
Since this is not the case, one must wonder if Washington's regulatory assault on the private sector might be a major problem. Since it takes time for markets to respond to changed circumstances, what happens in 2014 if the US economy starts to contract?
For the past year, as the US economy grew faster than its euro neighbors, the euro gained on the USD. Does this imply the USD will strengthen should the US economy falter?
The market is anticipating a weaker USD if the Fed does not give us a timetable for the taper. The news will be interesting, but more important will be how the market trades after the report.