Three Reasons Why the Fed Will Not Taper in 2013

December 17, 2013

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Capital markets around the world are trading all over the map ahead of this week’s Federal Open Market Committee meeting. One part of the debate is whether or not the Fed will taper when they meet next week. The other part is if they hint that they may taper sooner than initially expected.

How are markets reacting? The gold and bond market are trading as if the Fed will taper as they continue to trade just above their lows for the year. The stock market is not sure, but remains worried about a possible taper, and the U.S. dollar is caught like a deer in head lights waiting for a thumb’s up or a thumb’s down from the Fed. To taper or not to taper, that has now become the question around December’s meeting. One thing I have learned after studying countless market cycles is that the perception of an event is much more important than the actual event.

That said, here are three reasons why I do not think the Fed will taper this week:

1. Only one of the Fed’s targets has been met:
The unemployment rate must be at or below 7 percent. This has only happened for one month, and they still want to see more data to confirm that it is not an anomaly.

and (not or)

The goal for inflation is 2 percent. Actually, one could argue that deflation is more of a concern right now than inflation.

2. Yellen’s In, Bernanke’s Out:
Janet Yellen is expected to take over in January, and she is a big proponent of qualitative easing (QE). So, from our point of view, the likelihood that the Fed tapers in December is not very high.

3. Shop Till You Drop:
Finally, the Fed knows that the Q4 shopping season is very important for the overall economy and so far sales have not been robust. If the Fed were to taper one week before Christmas, that would surely hurt sentiment, stocks and the economy. Based on everything the Fed has told us so far, I highly doubt the Fed will go out of its way to hurt the economy at this point.

The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.

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