Global Economy: No Halloween horrors in store from the Fed

Sun Oct 27, 2013 2:08pm EDT
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By Alan Wheatley

LONDON (Reuters) - Back in May and June, Federal Reserve Chairman Ben Bernanke played a trick on markets by sketching out a timetable for reducing the central bank's $85 billion-a-month bond buying. Investors recoiled in horror and bond yields surged.

This week, though, they are in for a treat.

The Fed's policy-making committee ends a two-day meeting on Wednesday and the chances are vanishingly small that it will start to dial down the monetary stimulus right away.

The recent government shutdown in Washington and last-gasp deal to raise the federal debt ceiling have simply created too much economic uncertainty.

As a result, the usefulness of September figures on industrial output, retail sales and consumer prices as well as the Institute of Supply Management's October manufacturing survey will be limited.

Apart from a dearth of ‘clean' data for the Fed to analyze, the labor market's lackluster performance has convinced many economists that the Fed will delay ‘tapering' until 2014. What more could liquidity-driven markets ask for?

Jamie Dannhauser of Lombard Street Research, a London consultancy, expects the Fed to start curtailing its bond buying in the first quarter of next year, by which time Bernanke will have been succeeded by his dovish deputy, Janet Yellen, and to end asset purchases by the end of 2014.

Dannhauser is bullish on the U.S. economy, not least because stiff fiscal headwinds will ease next year.   Continued...

The facade of the U.S. Federal Reserve building is reflected on wet marble during the early morning hours in Washington, July 31, 2013. REUTERS/Jonathan Ernst