Will US Fed end 2013 with bang or whimper?

Dec 15 2013, 10:35 IST
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The Federal Reserve holds the wild card for the US stock market next week. The Federal Reserve holds the wild card for the US stock market next week.
SummaryThe Federal Reserve holds the wild card for the US stock market next week.

The Federal Reserve holds the wild card for the US stock market next week. Will the US central bank now slow the pace of its stimulative bond buying as the economy's outlook begins to brighten or will it wait, setting the stage for stock investors' undreamed of gains to keep going?

Fed policymakers gather for the last time in 2013 for a two-day meeting that concludes on Wednesday. Many investors are still expecting the Fed to delay scaling back its $85-billion-a-month bond buying programme until early next year.

But recent developments suggest a December move by the Fed is at least in the realm of possibilities. Those developments include a stronger-than-expected November jobs report, a US budget deal in Washington and the latest signs of tame inflation.

The Fed's ultra-loose money policy, adopted more than four years ago, has helped lift the Standard & Poor's 500 index 24 per cent so far this year. In an effort to promote economic growth, the Fed has been buying Treasuries and mortgage-backed bonds to keep long-term interest rates low.

Stocks temporarily pulled back from their rally this year when Fed Chairman Ben Bernanke began hinting in May that a reduction in the stimulus programme may be near.

Comments by Fed policymakers this week have leaned toward the central bank being closer to trimming bond purchases. St Louis Fed President James Bullard, who is a voting member on the Fed's policymaking committee, said the Fed could slightly reduce the purchase programme this month after signs of a stronger job market.

What the Fed will do is still an open question. The central bank surprised many investors in September when it kept its stimulus in place. The S&P 500 is on track to end 2013 with its best yearly gain since 2003, so what the Fed decides could mean the difference between pulling back or resuming the advance.

Even as it has begun to talk about reducing stimulus, the Fed has vowed to keep interest rates low for a long time, and most Fed officials expect no rate hike until 2015. That means the Fed is likely to be very careful to create a cushion for the economy, as well as the markets, they said.

Investors will be keen to hear any comments from the Fed on how long it is likely to keep rates low.

Given the amount of talk surrounding a Fed tapering, investors could hardly be in for a punch, analysts

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