Taper trauma: As Fed meeting begins, global markets feel the jitters

Financial markets are on edge as the US Federal Reserve begins a two-day meeting — the last  one for this year — on Tuesday.

The bets are increasing that the chairman Ben Bernanke and his team will announce a ‘tapering’, or gradualpullback, of the central banks’s $85 billion-a-month monetary stimulus.

It’s a very close call and expert opinion seems to be evenly divided between those who believe a tapering will be announced on Wednesday and those who think a possible timeline for tapering, not tapering itself, will be announced.

In Asia, stocks climbed on Tuesday, while European stocks fell after recent gains, indicating a mixed-mood sentiment.

Gold prices, meanwhile, have slumped in anticipation of a sooner-rather-than-later Fed tapering (the shiny metal is trading at around $1,235 a troy ounce), while the US dollar has gained ground against some major currencies, such as the Japanese yen, for the same reason.

Why is gold falling? A tapering of monetary stimulus is seen as a signal that monetary policy is now a step away from prompting longer-term inflation, one of the main reasons why investors have been buying gold in recent years (to hedge against inflation).

The dollar is gaining because a dialling down of the monetary stimulus will reduce the supply of dollars, which enhances the value of the greenback against other currencies.

Even as nervous investors position their bets, the outcome of the Federal Reserve meeting remains up in the air.

Will Bernanke pull back or won’t he?

It won’t be long before we find out. Only one more day to go.

[Image Credit]

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