Monday, May 13, 2013

Is the Fed Prepping Markets for the End of QE?

If an article in Monday's Wall Street Journal is anything to go by, the U.S. Federal Reserve is getting ready to unwind its massive monetary stimulus program. And that prospect is unlikely to be as alarming for financial markets as feared, analysts tell CNBC.

Fed officials have mapped out a strategy to wind down its $85 billion-a-month bond-buying program in careful steps, although the timing of when that will start is still being debated, noted Fed watcher Jon Hilsenrath wrote in the WSJ.

Any unwinding of the Fed's quantitative easing (QE) program, which has fueled a rally in equity markets and other risk assets, is generally viewed as negative and any indication of this happening has been highly anticipated in the U.S. since late last week.

"Having spent two New York sessions pricing in a sharp change in Fed stance, it is not obvious that the article was worth the wait," analysts at Westpac said in a note. "The timing of the unwinding of QE remains data-dependent, not a serious prospect until perhaps late U.S. summer at the earliest."
Analysts say that in essence, the Fed appears to be managing market expectations that its quantitative easing program will not last forever.

The Fed has said that it would maintain its key interest rate between zero and 0.25 percent until the unemployment rate fell to 6.5 percent. It has also committed to monthly purchases of bonds until labor market conditions improve substantially.

Sooner Rather Than Later?

And it is the recent signs of improvement in the jobs market that has renewed talk about a possible end to the quantitative easing. The latest non-farm payrolls report showed the U.S. economy created 165,000 new jobs last month, much more than expected, helping push the unemployment rate down to 7.5 percent. Data last week meanwhile showed jobless claims at their lowest level in almost 5-1/2 years.

"The timing is still a bit uncertain, but our view is that there will be no more QE from the United States after December this year," said Geoff Lewis, global market strategist, J.P. Morgan Asset Management.
"They're [Fed officials] not going to raise interest rates they've told us that until unemployment comes down to 6.5 percent, but that could be as soon perhaps as the first half of next year," he added.
Lewis said that the Fed would have no choice but to taper off QE in the face of stronger economic news and that was unlikely to lead to alarm in equity markets that have thrived on the aggressive monetary stimulus.

U.S. stocks hit fresh highs on Friday, while markets in Asia and Europe have also seen stellar gains this year. "That [an easing of QE] would be good for U.S. stocks because it would mean the U.S. economy is doing a lot better," he said.

Martin Lakos, division director, Macquarie Private Wealth told CNBC Asia's "Squawk Box" that he also remained positive on the outlook for stocks."The central bank is clearly trying to massage markets that QE is not going to be around there forever. I don't think that is a big risk as they [the Fed] are managing expectations," he said. "We remain positive on equities over the next couple of years."

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