All eyes on the Fed as investors weigh September taper odds


As the September Fed monetary policy meeting is drawing near, the debate on the FOMC's possible decision to start scaling back the asset purchase program is becoming more and more heated. Recent developments, such as the disappointing August NFP numbers, as well as the ongoing Syrian conflict, have shaken economists' confidence as to whether the QE taper will really be initiated next week.

“With a job market 'far from satisfactory' and a promise to adjust monetary policy depending on economic conditions, it would not be a surprise if the Fed postpones the reduction of monthly asset purchases until the next meeting in late October,” Ilian Yotov suggests. Alexandra Estiot also doesn't expect the Fed to make the move at the upcoming meeting, reasoning that “the likeliness of inflation pressures showing up is close to zero,” which means “the cost, in terms of inflation, of ending QE3 too late is nil, while the benefits, even if very difficult to clearly assess, are positive.”

Despite the doubts about whether the Fed will start reducing QE in September, all of the economists agree with Steve Ruffley that the FOMC “are planning to taper by the end of the year and nothing will change this.”

Some of the analysts taking part in the forecast report still believe however that the slowdown of the monthly asset purchases will be announced at the upcoming FOMC meeting. They believe that the employment data hasn't been that bad (after all the unemployment rate fell to 7.4%) and point out that the Syrian crisis has calmed down in recent days. They also remind that several dovish Fed officials declared their willingness to have an "open mind" about tapering at the September meeting.

Adam Narczewski is the most confident that the Fed will proceed with the QE slowdown, and predicts that it will “reduce its asset repurchase program by 10bln USD.” Valeria Bednarik also allows for such a possibility, stressing however that “a 10/15B taper won't be enough to support the greenback, as most of it is priced in.”

The FOMC will announce its monetary policy decision on September 18 at 18:00 GMT. Below you will find the full forecasts of the contributing economists.

Alexandra Estiot - Senior Economist at BNP Paribas:

Alexandra Estiot"We do not expect the Fed to announce a slowdown in the monthly pace of security purchases in September. The August labour market report was a disappointment, but the pace of job creation slowed down earlier. For sure, the unemployment rate is falling, but because of discouraged job seekers giving up all together. Other measures of labour underutilisation (people willing to work full-time but ending up on a part-time position…) are even gloomier, pleading for cautiousness in removing monetary accommodation. The only element that could push FOMC members into deciding such a move would be that they feel like December is too far a date. With the economy still not showing any sign of sustained acceleration, neither in activity nor in job creations, the likeliness of inflation pressures showing up is close to zero. This means that the cost, in terms of inflation, of ending QE3 too late is nil, while the benefits, even if very difficult to clearly assess, are positive. Thus, the balance between costs and benefits is about financial stability. As the early talks about the 'tapering' ended up pushing up yields very quickly, it appears clear that financial markets are building up expectations about what is coming next. The risk in announcing a slowdown in monthly security purchases is for rate hike expectations to rise, with a collateral risk on interest rates. Another reason to wait is the uncertainty about who the next Chair of the Fed will be. This will be known in December. If Janet Yellen were to be named and confirmed, she could weigh on even more heavily on the decision on the policy to be implemented going forward. A possible decision to be made in September could be the announcement of more regular post-meeting press briefings. That would definitely clear the way for major policy move to be announced at whatever meeting and not just four times a year."

Steve Ruffley - Chief Market Strategist at

Steve Ruffley "The data out of the US in my opinion was not that bad. Again more market scaremongering adding to the confusion of what the FED should do. Bernanke and the FED are by no means helping themselves by not giving the market any clear indication of when tapering will happen. However we all know it will happen. By looking at the markets and the huge sell off in Treasuries the market has told us it believes that tapering is imminent and a reduction in the bond back buying program will be the end of the free money.

I believe the FED are planning to taper by the end of the year and nothing will change this. Friday’s NFP was not that much of a concern and frankly anything that is not disastrous figure is actually a positive these days. As we don’t know exactly when or how aggressive the taper will be the advice is to carry on buying dips in the stocks as the bonds are only heading one way for the foreseeable future, down."

Ilian Yotov - FX Strategist and Founder at AllThingsForex:

Ilian Yotov"Two consecutive months of disappointing non-farm payrolls data have reduced the odds of a Fed taper announcement following the September 17-18 meeting. With a job market 'far from satisfactory' and a promise to adjust monetary policy depending on economic conditions, it would not be a surprise if the Fed postpones the reduction of monthly asset purchases until the next meeting in late October. Should the FOMC decide to wait, the USD could register another month of weakness, similar to the greenback's trend in July and August."

Adam Narczewski - Financial Analyst at X-Trade Brokers, XTB:

Adam Narczewski "We are all waiting for September the 18th and waiting for the Fed's action. No doubt the Fed will act and reduce the QE program. The question is by how much. Some polls made a couple of weeks ago showed that some experts were expecting even a 35bln USD reduction in QE (from the current 85bln USD). I have never expected such big number but still 20-25bln USD was reasonable. After the last two NFP readings (worse than expected) the situation has changed. Even the strongest hawk within the Fed, Esther George, mentioned the Fed should cut QE by 15bln USD. So, it is not going to be 15 but less. My expectation is the Fed will reduce its asset repurchase program by 10bln USD on September the 18th."

Bill Hubard - Chief Economist at  

Bill Hubard"Of course, the weak US labour market report released on Friday has fired up the local debate on the path of Fed tapering.  Ahead of the US labour market report, the consensus was for a $20bln reduction of QE to be announced at the September meeting. In light of the debate in St. Petersburg and the weak US labour market report, the $20bln cut represents the upper limit, with consensus now lower. The Fed’s George favours the Fed ‘tapering’ QE purchases by $15bn at 17-18 September’s FOMC, while the WSJ’s Hilsenrath called the upcoming Fed decision a 'cliff-hanger'.

The market is still undecided about the timing and extent of Fed 'tapering' although any move at the FOMC meeting is likely to a be what you might call a 'dovish' taper (ie a reduction) and we are looking for Treasury purchases of $10bn, no change in purchases of mortgage-backed securities and 'dovish' forward guidance on interest rates."

Yohay Elam - Analyst at Forex Crunch:

Yohay Elam"There is a a very high probability that the Fed will announce a reduction in the pace of bond buying on September 18th, and probably by $15 billion to $70 billion. Despite the recent weak employment report, the US is still growing and creating jobs. At this point, the effectiveness of bond buying is limited, and the Fed would prefer that the government pick the baton and provide address the sequester. Bernanke and co. can look at QE and see it as a success story in the housing market, with a clear recovery. However, with house prices rising around 12% YoY (Case Shiller), perhaps the time has come to reduce the level of stimulus (the Fed doesn't see tapering as tightening) to avoid blowing a bubble. In addition, the Fed might worry about other bubbles in stocks, commodities and emerging markets. 

The notion that the 'Septaper' is coming is strengthened by recent comments from Fed officials, that come with 'an open mind' to tapering in September. This includes the doves. With the Syrian issue somewhat defused, there are very little chances that the Fed will not taper.

QE tapering is not fully priced in, and we could see the dollar strengthening afterwards. A lot depends on the guidance to the next tapering steps, and this remains a mystery for now."

Alberto Muñoz, Ph.D. - Forex Analyst at

Alberto Muñoz "Latest US employment report came as a complete shock as only 169,000 jobs were created, below the consensus number. Also people leaving the labor force and the downwards revision of the July report weren't good news at all for the US economy. Therefore it looks unlikely that the Fed will begin tapering in the next meeting though the bias to taper will remain intact as probably the Fed needs more evidence that the economy is in a strong recovery path before reducing the pace of asset purchases. Also Bernanke will probably show a stronger commitment to keep rates low for an long period of time. Now the next move will depend on the September employment report: if we have good news in the US labor market, tapering could begin after the Oct. 28-29 FOMC meeting, concluding the process by the next year, between spring and summer."

Valeria Bednarik - Chief Analyst with

"Market has been dancing at the pace of a possible September QE tapering for the past few months, with the greenback rising when hopes increase, and falling when chances dilute; movements had been by far more significant when the idea first came out, than lately, as investors started to price in some probable taper.

The day has come, and things are not as good as to be confident the FED will start reducing its bond programs: employment data shown signs of improvement with unemployment rate down to 7.4%, lowest level since Dec 2008, but the feeling is that latest numbers are not enough. Nevertheless, market is now thinking more on 'how much' rather than 'if', as even the ultra doves had announced past week that they will come to the meeting with an open mind regarding tapering. I believe that the FED may announce a reduction in its buying program, but I also believe a 10/15B taper won't be enough to support the greenback, as most of it is priced in. A delay towards year end will likely see dollar nose diving across the board, while a reduction of 20B or more will give the dollar a strong boost higher."

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