Is the Fed inching closer to a December taper?

A US budget deal aimed at easing spending limits and preventing a government shutdown was passed by the House on Thursday.

The bill is expected to win approval in the Senate next week.

Political wrangling over a budget deal was one of the factors that had led some market experts to believe that the Federal Reserve would not announce a tapering of its $85 billion a month bond-buying programme.

October’s government shenanigans-led shutdown cost an estimated $24 billion to  the US economy, and it seemed unlikely that the Fed would add to the pressure on the economy by announcing  a pullback in monetary stimulus weeks before yet another deadline for coming up with a budget deal (and possibly another round of government shenanigans) comes hurtling down  (January 15 is the deadline for the expiry of current funding plans).

So now that a watered-down budget deal seems set to sail through Congress, will the Fed feel more confident about easing the throttle on its monetary stimulus in December?

A lot of observers believe the odds of that happening are improving now, especially after better than expected economic data (US GDP data and the jobs report pleasantly surprised everyone).

The currency markets are operating on the assumption that the Fed will begin reducing its monetary drip-feed from next week: the dollar hit a five-year high against the Japanese yen on Friday, indicating that markets are veering to the view that the taper will come sooner rather than later.The dollar was trading at 103.92 yen in afternoon Asian trade.

The dollar is gaining strength because a taper, in theory, reduces the amount of dollars out there, which in turn, pushes up the value of the currency.

Translation: the markets believe the taper is coming next week.

I still think the Fed will hold back from announcing any tapering next week (the Fed will hold its last meeting of the year on December 17-18), preferring instead to sit on its haunches and wait for a couple of months to reassure itself that the recent positive economic developments are sustainable.

It is possible, however, that it could announce a timeline for tapering next week (an actual pull-back of stimulus could start in January or March).

Of course, there are several experts out there who think that the stimulus will continue forever, and this CNBC video interview contains an interesting contrarian view from  economist James Shrugg of Westpac, who calls the tapering plan a ‘hoax’.

That may be stretching things a bit, but it’s an interesting interview nevertheless.

In any case, with five days to go, the countdown has begun.

I don’t know about you, but I can’t wait for December 18.

[Image Credit]

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