Brace yourself, the second round of Fed tapering is coming

Yes, the second round of tapering is likely to be announced when the US Federal Reserve meets on January 28-29, which will be Ben Bernanke’s last meeting as Fed chairman before he steps down from his position on January 31.

In December, the Federal Reserve announced that it would start dialling back its not-insignificant $85-billion-a-month bond buying programme (called Quantitative Easing in economic lingo) by $10 billion (or to $75 billion) in January.

Judging by recent comments from some Fed officials and market analysts, it seems everyone is preparing for another bout of tapering at next week’s meeting. The expectation is that Fed will announce a further $10 billion reduction to its bond-buying programme to $65 billion from February.

According to some market analysts, if everything goes according to plan and there are no unexpected financial shocks in 2014, the Fed could keep cutting its asset purchases by $10 billion after every policy meeting.

The Fed is scheduled to hold policy meetings eight times this year: January, March, April, June, July, September, October and December. The central bank has indicated that it would like to shutter the bond-buying programme by the end of 2014.

Two Fed officials have also shown support for this pace of tapering, according to a Marketwatch report. Market experts also believe the Fed is unlikely to hit the brakes on tapering, according to a Bloomberg report.

A noted Fed Watcher and Wall Street Journal journalist, Jon Hilsenrath, also thinks the taper is on, despite the setback in US jobs growth in December.

The US economy managed to add a mere 74,000 jobs in December, which was the smallest gain in three years. However, most experts say that extremely cold weather probably contributed to a slump in hiring.

In fact, one Fed official, Jeffrey Lacker of the Richmond Regional Reserve Bank, said that signs of an improving labour market are supporting of the Fed continuing the taper. He dismissed the poor jobs growth in December as an “aberration”.

“It would take a very significant change in the outlook for me to support not tapering, and I don’t think the data we’ve seen so far are close to that,” Lacker was quoted as saying in a Reuters report.

If the Fed does go ahead with steady, incremental cuts, expect  emerging markets to become more agitated in the months ahead as they experience withdrawal symptoms, reflected by foreign investors pulling some money out.

On the plus side, a stronger US economy will likely pull in more exports from Asia and other emerging regions, which should provide some consolation — and compensation — for decreasing financial market flows.

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