Wall Street Week Ahead: Fed may taper without causing market tantrum
By Ryan Vlastelica
NEW YORK (Reuters) - Months of anticipation will come to an end next week when the Federal Reserve finally says whether it will start to rein in its massive stimulus of the economy, which has flooded financial markets with some $2.75 trillion over the past five years, supercharging returns on everything from stocks to junk bonds.
But for all the concerns that the reduced presence of such a giant asset buyer would be calamitous for investors, it appears equity and bond markets are poised to take next week's Fed decision largely in stride - provided the central bank doesn't surprise with the size of its move or shock in some other way.
The Fed has telegraphed its intentions to pare back its monthly purchases of $85 billion in bonds at its two-day meeting that ends next Wednesday. The scale of the tapering and what Fed Chairman Ben Bernanke might say at his press conference are key here, but the steady messaging in the last few months means next week probably won't see carnage in the markets.
Investors have already done a lot of work in absorbing the Fed's message. Benchmark bond yields are now hovering near two-year highs, while stocks have edged off highs reached in early August, removing some of the froth that had started to concern some investment strategists.
"The Fed already got tapering without actually tapering," said Daniel Heckman, senior fixed income strategist at U.S. Bank Wealth Management in Kansas City, Missouri.
Key measures of volatility and futures positioning show there is not much fear. The CBOE Volatility Index , the market's favored gauge of Wall Street's anxiety, hovered around 14 on Friday, a level associated with calm markets.
The Fed has said it would wind down its program if it is confident that the economy is improving, particularly that the jobless rate is heading lower. If it delays any action, it could raise concerns that it fears economic growth is going to be too anemic without the Fed's help.
Recent data has been mixed, with August jobs and retail sales data falling short of expectations. Consumer sentiment has fallen in part due to rising interest rates. Continued...