Here’s why Fed tapering might not be as scary as it seems

Financial markets are such worrywarts. They always have something to worry about. At the moment, fear of Fed tapering is dominating minds. In the summer, markets, especially in emerging nations, went into a tailspin as worries grew about the U.S. central bank dialling back its massive $85 billion-a-month bond buying programme.

The constant drip of monetary stimulus has buoyed currencies and asset markets such as stocks and real estate around the world. With interest rates at rock bottom rates (practically zero percent) in developed countries, investors have been borrowing money in countries such as the U.S. and investing in higher-yielding assets in emerging markets.

A tapering will lead to lower money in the financial system, which inevitably raises the cost of funds. Economic data from the U.S., however, isn’t providing definite clues about when the Federal Reserve will start the tapering. But investors are already fretting.

They shouldn’t. Another tsunami of money could be on its way, potentially making up for any Fed withdrawal from the market. Moribund economic growth in the eurozone and the threat of deflation prompted the European Central Bank to slash its benchmark rate (refi rate) to a record low of 0.25%.

More significantly, a top ECB official declared that all options are on the table to boost the eurozone. And yes, that means quantitative easing in the form of asset buying.

There is no ‘smoking gun’ yet that demands quantitative easing, but the fact the ECB is considering that very unconventional of monetary tools suggests they are prepping the markets for just a move in the future if prices do not behave (continue falling).

Net result: just as the Fed is considering a withdrawal of stimulus, the ECB may be preparing to step up the same.  Monetary policy might be heading in opposite directions on either side of the Atlantic, which could work to the advantage of investors.

The morphine drip that is easy money looks set to continue. Investors can go back to living under the illusion that things are alright again.

Until they find the next thing to worry about.

[Image Credit]

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s