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Jackson Hole: Timing of QE taper still the puzzle to solve

FXstreet.com (Barcelona) - The Federal Reserve remains on course to scale back its bond purchases, with some experts thinking September is when the first tweak will be effective, while others expect the central bank to hold the fire for a while longer, according to headlines gathered by media outlets attending this year's Jackson Hole symposium.

Is a new era of less aggressive monetary policy about to unfold?

That is certainly what the Fed has tried to carefully communicate to the market for quite some time, to the point where there is no choice but a small space between September and December for maneuverability, unless Bernanke and Co. want to orchestrate what might the most outrageous disappointment financial market have seen for years, given the extraordinary implications that this is having all over the world, including the outflows of capital in emerging markets back to the U.S.

The Fed has and will provide what the market has been recently discounting back and forth sooner rather than later, yet there is still some flexibility on the dates, with September to December, the 4 choices they have depending on the next barrage of data. The S&P 500 performance is a good proxy to assess how bets towards QE taper stand, having found a top at 1700 prior to some consistent selling-off, yet printing a suspicious bullish engulfing day last Thursday before some minor follow through.

Jim O’Sullivan, chief U.S. economist at High Frequency Economics, said “the message is right now that they go in September. I haven’t heard anything to suggest expectations for a September move are off-base.”

However, the dilemma is not just whether or not the Fed will start to cut the asset purchase plan, but by how much, with some Analysts expecting a reduction by $20 billion in September vs more conservative bets look at a smaller $10 billion reduction. The Federal Reserve is currently buying $85 billion worth of asset every month.

Minneapolis Federal Reserve Bank President Naryana Kocherlakota was quoted by MNI, noting: "it is really a stretch to think that the Fed has lowered rates too much", adding that given the high rates of unemployment and low levels of inflation, “I think what we’re seeing is that we have not been able to lower rates as much as we’d like to.” Kocherlakota also added that "the Fed will need to maintain a highly stimulative monetary policy for some time to come."

According to Greg Robb, a senior reporter for MarketWatch: "Many participants at the Jackson Hole conference want the central bank to wait until later in the year as there are an impressive array of challenges that await the central bank this fall."

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