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What to expect from the Fed?

Speculation on when the Federal Reserve will taper QE3 has provoked a surge in the market’s volatility. US economy is evidently showing some signs of recovery, but is it strong and stable enough to survive without the monetary stimulus?

According to the article of the influential Fed watcher Jon Hilsenrath in Wall Street Journal, tapering of the easing program won’t mean that it will end all at once and, what is even more important, it won’t mean that the Fed is “anywhere near raising short-term interest rates”. Next week Hilsenrath expects Ben Bernanke to reiterate that there will be a considerable period of time between the end of QE and a rate hike.

Deutsche Bank analysts agree that Bernanke will underline that the timing of any withdrawal will depend on US economic performance. Capital markets became worried by the possibility of losing “easy money”, so Bernanke is likely to calm the fears by saying policy will remain soft.

Adam Button, editor at Forexlive, sumps the situation up pointing out that at the moment the markets are trading erratically and with no clear understanding of what to expect. Button says that, on the one hand, USD is supported by the idea of QE tapering. On the other hand, the Fed may be reluctant to taper in the current conditions and that’s a USD-negative factor.

Opinions on the matter differ, but everyone agrees that we have to wait for more hints from the Fed on June 18-19.

Image: Bloomberg

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