We’re likely to see some signals this week from the Federal Reserve on where their economic stimulus program is going. Ben Bernanke is booked to speak at the National Economists’ Club in Washington on November 19, and Charles Evans – the Chicago Fed President – is up to bat at the Midwest Bank Leaders Conference on the same day. Soon we will have confirmation of what they said, but it is probably a foregone conclusion – they are unlikely to begin to taper quantitative easing before the end of March, 2014.

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If you remember, there were rumblings out of the Fed a few months ago about starting to reduce the $85,000,000,000 – yes, that is a lot of zeros – that they are currently pumping into the U.S. economy each month through asset purchases. This led to turmoil in the market at the time, which turned out to be unwarranted given that the Fed didn’t actually take any action after signaling that it might. In some ways, the Fed shot itself in the foot over this one, and at the very least it was a major communications blunder. Let’s hope that what they come out with this week will prove to be more reliable.

There are also some hints that they may lower their threshold guidance for unemployment. Basically, this is the line in the sand that influences when they will start to pull back on economic stimulus, and even start to think about raising interest rates. The threshold stands at 6.5%, and rumors are flying that it could come down to 5.5%. If so, that would indicate that the Fed is determined to promote a very robust U.S. recovery – by comparison, the Bank of England’s Governor, Mark Carney, has pegged the equivalent unemployment target in the UK at 7%. However, it is worth noting that the BOE is only charged with keeping inflation in check, whereas the Fed is mandated to address both inflation and unemployment – and therefore is likely to set more aggressive unemployment targets.

Of course, US savers will be tearing their hair out when they hear this news. Considering that today’s average CD rate is somewhat below 1%, the environment for savers at the moment is pretty grim. Quantitative easing was introduced as a last resort when the Fed had already dropped interest rates to basement levels in an attempt to prevent economic collapse in the aftermath of the 2008 financial crisis. Therefore, until quantitative easing tapers, there is little likelihood that interest rates are going to go up.

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There is also a good chance that the U.S. dollar is going to come under pressure when the Fed makes its mind known. Up until recently, the market had expected tapering to begin in December, and pushing it out three months is likely to cause bullish positions in the greenback to start to unwind. In fact, long positions are looking particularly stretched at the moment, suggesting that the trend could be fairly pronounced – at least for the short-term.

This entry was posted on Tuesday, November 19th, 2013 at 5:57 pm and is filed under Personal Finance. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.