Look who’s celebrating in hopes that Fed won’t ‘taper’ today

Stock and commodity investors, that’s who. They’re wagering that the Federal Reserve will not begin unwinding its massive $85-billion-a-month asset buying programme just yet and are celebrating in advance.

The Dow Jones and S&P 500, two widely-tracked stock indices, ended Tuesday at record highs  on hopes that the Fed’s ‘tapering’ would be held back given the recent rash of subdued economic data. The Dow Jones Industrial Average gained 111 points to close at a record 15,680.35, while the S&P 500 ended 9.9 points higher at 1,771.95. In commodity markets, Brent crude also climbed above $107 a barrel earlier this week.

The Fed will be making an official policy statement on Wednesday 2 pm EDT, but given the prolonged government shutdown earlier this month (which delayed the release of several economic data)  and softer economic indicators since then, more  investors are coalescing around the view that the central bank is likely to hold back on introducing tapering at least until 2014.

Both the housing and employment market are currently showing surprising weakness in the US, which are likely to give Fed pause for thought.

The Fed’s bond purchases have steadily released copious quantities of liquidity into the markets, which investors are borrowing at low rates (around 0% in the U.S.) and investing in higher-yielding assets, such as emerging market stocks and oil. Any pull back by the Fed would tighten liquidity, reduce risk appetite and prompt foreign investors to take money out of emerging markets. Not surprisingly, emerging markets have been on tenterhooks ever since Fed chairman Ben Bernanke announced his intention of ‘tapering’ in May. Even the International Monetary Fund has warned of an asset crash in international financial markets and a financial contagion if monetary stimulus wind-downs are not handled properly by central banks in industrialised nations.

The markets will be praying that the policy announcement passes off peacefully into the night without causing any heavy-dose upheavals. Today, it’s the boring Bernanke that investors will want to see.

We’ll bring you updates of the Fed announcement as we get it.

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