Newspaper article The Canadian Press

Traders Look to Federal Reserve for Clarity on Cutting Back on Monetary Stimulus

Newspaper article The Canadian Press

Traders Look to Federal Reserve for Clarity on Cutting Back on Monetary Stimulus

Article excerpt

Traders look to mid-week Fed meeting

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TORONTO - Stock markets will likely start the trading week in a holding pattern and stay there until Wednesday when investors find out if the U.S. Federal Reserve ends months of speculation and decides to start winding up its asset purchases.

"We believe the conditions are more than ripe," said Doug Porter, chief economist at BMO Capital Markets.

Many traders aren't happy to see an end to the US$85 billion a month of asset purchases as they have kept long-term rates low and supported a strong advance on many markets this year, including the Dow industrials which has surged a good 20 per cent.

That hasn't been the case in Toronto where the TSX is heavily weighted in favour of the resource sector.

There has been a great deal of uncertainty surrounding tapering, particularly since September when the Fed surprised markets by saying the time wasn't right to starting winding up the program.

Analysts believe the prospect of a government shutdown over budget wrangling, along with difficulties in extending the debt ceiling, helped persuade the Fed to postpone tapering in September. The 16-day shutdown in October crimped economic growth and hurt consumer confidence.

But just this past week a bipartisan committee struck a budget bill.

That came on top of a slew of strong economic data the previous week, capped by a strong employment report for November.

"Between the solid employment report and the apparent preliminary budget deal, I would say those two events alone have pushed up the odds," said Porter.

"Frankly, ever since the September meeting, I think analysts have been a bit at sea as to exactly when the Fed plans on tapering and exactly what kind of schedule they're looking at. But based on that fog, we would give a 50-50 odds that they will actually begin to taper as early as (this) week."

Porter said inflation is the strongest economic reason he can think of for the Fed holding off until early 2014 when incoming Fed chair Janet Yellen gets settled in the job.

And that's because inflation at around one per cent is likely uncomfortably low for the Fed.

"But the counterpoint to that is the Fed cares about where inflation will be, not where it has been, and if they really believe that inflation will slowly pick up again, then I think that falls away as a reason not to taper as well," he said. …

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