The long-running guessing game over the tapering of the Fed’s asset purchases, that has dominated markets since May, has come to an end. Tapering will start in January. ING IM thinks that the lasting impact on markets will be subdued and that the ongoing global recovery continues to support investor risk appetite.
"With less of a lasting impact expected of Fed tapering, a sustainable recovery in sight and a gradual increase in equity allocations anticipated, we are heading into 2014 with a clear preference for equities in our overall asset allocation stance".
US short-term yields now more stable than earlier 2013
Fed starts tapering in January 2014
Last Wednesday, the Federal Reserve announced that it will start tapering the size of its asset purchases as from January. It will lower its monthly purchases to USD 75 billion from USD 85 billion currently – USD 35 billion in mortgage backed securities (from USD 40 billion) and USD 40 billion in Treasury debt (from USD 45 billion).
Forward guidance likely to be tested by markets in 2014
ING IM's base case for the Fed is now additional tapering of USD 10 billion at each of the following meetings, while we maintain our view that the first rate hike will come in the fourth quarter of 2015. "Furthermore, we do not expect a further enhancement of the forward guidance language beyond the qualification that rates will be on hold “well past” the time that the unemployment rate drops below 6.5%".
However, the risks to this view are tilted towards hiking at a later date. "Also, we see a distinct possibility that the forward guidance will be enhanced further, possibly with something that contains more of a commitment than the December innovation which was mostly qualitative. The reason for the latter is that the above-potential growth rates that we expect in 2014 may well cause the market to start pricing a more aggressive hiking path for the Fed Funds rate than currently". If that happens, the Fed will need to take action to re-anchor these expectations.
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