Will the US Fed taper this month? – Paxforex

The US Federal Reserve will meet this month on December 17th through December 18th for their last FOMC meeting of 2013 and the last one chaired by Ben Bernanke. Plenty of traders will look forward to the FOMC statement issued on December 18th and there is a growing amount of market participants and Fed watchers which think the US Fed may taper its $85 billion per month stimulus package.

Should the US Fed indeed decide to taper it may only be a minor amount and in general there will be a tremendous economic stimulus in place in the US. There are two reasons why more and more think that tapering is on the horizon. Despite the growth in the pro-taper camp, the overall figure remains roughly around one-third who thinks tapering will occur this month.

One of the reasons behind the increase is that a potential budget compromise may have been reached yesterday which could lead to a reduction in economic stimulus in the US. Sources cited one of the primary reasons why the Fed did not taper back in September was doubt about how the budget crisis will play out which forced the US Fed to keep the current pace of its quantitative easing. Should this potential budget deal gain support between now and when the FOMC meeting begins the Fed may be tempted to ease off the money printing.

Another reason is the wildcard Ben Bernanke who may want to leave his tenure at the Fed with a moment to be remembered by. He initiated the massive economic stimulus which added several trillion dollars’ worth of debt to the Fed and he may want to be the first to reduce. Whether he can convince his colleagues to vote in his favor remains to be seen and we may not get a unanimous decision out of the FOMC.

Forex traders are likely to push the US Dollar momentarily higher should a minimal taper occur, but any US Dollar strength is likely to be short-lived as traders will dump equities and be clouded by uncertainty over future US economic performance. Should the US Fed decide to taper it is very likely that new Fed Chief Yellen will increase stimulus within her first six months on the job.

Written by Paxforex