Fed Tapering – Waiting with Bated Breath

Edited by Vani Rao

On Friday, higher-than-expected job data again raised the hope of Fed tapering sooner than later. Markets across the world have started reacting to the speculation; the commodity and currency markets are among the first few to react. Commodities are witnessing huge pressure on prices whereas the US dollar is strengthening against most of its rival currencies.

Looking back at the employment report from the US Department of Labor last Friday, the economy has added 204,000 jobs in October (as shown in chart below), following revised job additions of 163,000 and 238,000 for September and August, respectively, from the original 148,000 and 238,000 jobs. October job numbers came significantly higher than the estimated 125,000 jobs. The better-than-expected job data again created a buzz around of the time that the fed will be exercising its tapering options and reducing its $85-billion bond-buying program. Moreover, the Fed has already shown its intention to support the bond-buying program until the stabilization of the employment conditions in the country.

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Although the jobs data portray a vivid picture of the economy, unemployment claims and wages growth are still half-hearted, supporting the growth argument. During October 2013, unemployment claims inched up to 7.3% from 7.2% in September 2013. Looking at the chart below, unemployment numbers are still much higher than the levels prior to the 2008-09 crisis. During October 2013, the wages growth was sluggish, increasing by just 0.1%, lesser than the expected 0.2% gain. The average workweek also fell 0.1 hour short of expectations at 34.4 hours inOctober2013, compared to 34.5 hours in September2013.

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Market Reactions on Fed Tapering News

Falling Commodities

Reacting to the end of the Fed-sponsored $85-billion monthly bond-buying program,most of the commodities are witnessing a fall. Gold has seen a continuous downward pressure, having lost more than 3% during last four trading sessions. Similar to Gold, other commodities like Crude Oil, Silver, Copper, and many other metals have seen a decline in demand and prices.

US Dollar Gaining Against Rivals

The US Dollar has gained against a basket of currencies in the last few days. This is mainly attributed to the strong job data last week, which triggered the tapering talk. The US Dollar is trading close to the two-month high against the sterling pound, US dollar and is at a seven-week high against its arch rival the euro. TheEUR/USD pair went down to 1.3343 before finding support and bouncing back to current 1.3437 levels. The weak German inflation data and raising concerns over weak demand in the euro zone kept the euro recovery in check. The euro’s recent decline against the US Dollar also factors in the recent unexpected slashing of the European Central Bank’s (ECB) benchmark rate from 0.50% to 0.25% as a result of the sharp decline in the euro zone inflation. During October 2013, the euro-zone inflation fell to 0.7%, which is way below the target inflation rate of 2%.

Is this THE right time?

With the improved job data, should the Fed start tapering? Our answer to the question is may be not; the Fed still needs to wait and be assured of the stable economic conditions. Although job data looks promising, the weak unemployment claims, sluggish wages growth, falling average workweek hours, and approaching debt ceiling in December does not allow us to assume that the right to start tapering has come. Minneapolis Fed President Narayana Kocherlakota also argues in favor of continued stimulus. “Inflation remains weak, or very low by historical standards, by the goal of 2% per year, so there is no reason to be afraid of monetary stimulus,” Narayana Kocherlakota stated during his speech at the St. Paul Chamber of Commerce, as reported by Reuters. The final decision lies with the Fed and the upcoming December meeting is expected to throw more light on the final outcome. It will be interesting to see what decision the Fed takes and how the market will react to its decision.

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