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When will the Federal Reserve begin to Taper Quantitative Easing?

PULLING THE PLUG ON QE SAXO CAPITAL WILL THE FED EVER TAPER? MARKETS 1-9> WALL ST The Federal Reserve shocked financial markets in September when it failed to deliver a much anticipated tapering of its asset purchase programme. With the prospect of QE Infinity edging back on the table, will the US economy recovery ever be strong enough to be taken off life support? ADDICTED TO QE Stubbornly high unemployment and a flagging US economy forced the Federal Open Market Committee (FOMC) to unleash a third round of quantitative easing in September 2012. Unlike previous stimulus measures, the Fed would commit to "open-ended" asset purchases, buying $85 billion worth of long-term securities a month. QE1 QE2 QE Infinity November 2008 November 2010 $600 billion in $600 billion in September 2012 mortgage-backed securities and longer-term Treasury $1,020 billion in mortgage-backed securities* at a rate of securities government- sponsored enterprises $85 billion a month *As of September 25th SOURCE: FEDERAL RESERVE CHECKING THE US ECONOMY'S VITAL SIGNS Following the launch of QE Infinity in September 2012, the US economy began to show signs of recovery. GDP rose by 2.5% in the second quarter of 2013 over the previous quarter. Meanwhile, the unemployment rate fell to 7.3% in August 2013, its lowest level in more than four and a half years. FOMC Projections Percentage change in real GDP Actual (Q2 2013) 2.5 -1 FOMC Central Tendency end - 2013 -2 2.3 2.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Longer UPPER LOWER Unemployment Level 10 Actual (August 2013) 7.3 8. FOMC Central Tendency end - 2013 7.3 7.1 2008 2009 2010 2011 2012 2013 2014 2015 2016 i Longer UPPER run LOWER SOURCE: FEDERAL RESERVE Actual GDP With the US economy on the mend, Fed chairman Ben Bernanke, in June 2013, indicated that the central bank was prepared to begin tapering QE towards the end of the year, adding that asset purchases would likely come to an end when the "unemployment rate is in the vicinity of 7%". Actual Unemployment Range of projections Central tendency of projections LOW FOR LONGER, BUT HOW LONG? While the Fed has said it intends to gradually reduce the pace of asset purchases by the end of the year, it pledged not to raise interest rates from their current low levels for at least another two years, by which time it expects the unemployment rate to fall to 6.5%. EXPECTED PACE OF POLICY FIRMING BASED ON FOMC FORECASTS 4 Each roundel indicates the most likely path of the Federal Funds rate at year-end based on FOMC members' views of the appropriate path of policy firming. LONG TERM 4.00 END 2015 1.00 END 2013 0.25 END 2014 0.25 2013 2014 2015 Longer Run SOURCE: FEDERAL RESERVE INVESTORS IN A QUANDARY OVER TAPERING PLANS Despite the Fed's pledge to keep interest rates low until 2015, market rates have risen sharply in recent months with the yield on 10-year US Treasuries almost doubling in the four months to September. John Hardy, Saxo's Head of FX Strategy, believes higher Treasury yields could hamper the Fed's attempts to taper QE. DATA IN US TEN YEAR SHOWING THE RECENT JUMP IN US BOND YIELDS TREAR WEARUR 3.00 2.00 TREANUY JUL 30th 2013 1.00 - . MAY 20th 2013 MAR 11th 2013 JAN 2nd 2013 "There will be a very modest start to tapering but it will eventually be derailed by a weak US economy that can't withstand the rise in interest rates we have already seen." John Hardy, Head of FX Strategy at Saxo Bank SOURCE: BLOOMBERG WHEN WILL THE FED START TO TAPER QE? The FOMC's surprise decision to reject a tapering of its asset purchase programme in September sent equity markets to record highs. This begs the question, will the Fed ever taper QE? 20.00k 15.00k 10.00k 5.00k .... Nov 2012 2012 2013 2013 2013 2013 2013 2013 2013 2013 2013 Jul Aug Sep DOW JONES DAX Apr May Jun Mar Feb FTSE Dec Jan SOURCE: BLOOMBERG DOW JONES INDUSTRIAL AVERAGE 66.7% DOW JONES 33.3% Long Dow Short Dow Two-thirds of Saxo Capital Markets' clients based in the UK are net-long the Dow index compared to one-third of UK clients that hold a net-short position in the Dow index. How are you positioned ahead of the next FOMC meeting? *As of 16 October, 2013 SOURCE: SAXO BANK RESEARCH SOURCES Saxo Bank Research: Federal Reserve, FOMC September 2013 Economic Projections: Bloomberg Market Data: This infographic has been produced for information puposes only and should not be considered as investment advice. Trading margin products can result in losses that exceed your initial deposit. FTSE is a trademark of the London Stock Exchange Plc and The Financial Times Limited a registered mark of Deu Börse AG Dow Jones Indexes SM are compiled, calculated and distributed by Dow Jones & Company, Inc. Saxo Capital Markets UK Limited is a company authorised and regulated by the Financial Conduct Authority, registration Number 551422. Registered address: 26th Floor, Bank Street, Canary Wharf, London E14 5DA.

When will the Federal Reserve begin to Taper Quantitative Easing?

shared by saxomarkets on Oct 30
Recent employment figures suggest the Fed is likely to continue to pump money into the US economy through the QE scheme. A stuttering labour market will delay the likelihood of QE tapering, inducing f...


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