Fed May Quietly Taper QE Before September
May 15 (Bloomberg) -- Bernanke, other Fed officials will probably drop hints about tapering QE before June meeting, then start reducing purchases behind scenes before formal announcement is made in Sept., said Lance Roberts, chief strategist at Streettalk Advisors.
"If I was Ben Bernanke, there would be two things I've got to be concerned about," Roberts said in phone interview today "One is creating asset bubbles: If you look at yields on junk bonds, they are at historic lows. The other is the margin on NYSE stocks, which is the amount of leverage investors have taken on. Markets have gone virtually parabolic"
"What the Fed has got to figure out is if it's solely because of what it is doing or because of the economy and underlying fundamentals"
"At the next meeting, I would start to put out language that says, 'At some point in the future we're going to see some tapering,' and see how the market reacts. If the market
reaction is fine, I would start doing that behind the scenes and announce it later"
"It's very possible we'll see hints come before the next meeting. It wouldn't surprise me to see more articles and more Fed officials talking about Fed tapering before June so there won't be a shock to markets"
"If you look at financial markets, they are extremely susceptible to a sharp, rapid correction. It would kill everything the Fed has put together. Bernanke will condition markets long before he takes action. We may see tapering occur prior to the Sept. meeting"
"I'm predicting nothing specific in the next few months. But in Sept., around the Fed's Jackson Hole event, we could get specific numbers"
Roberts said he expects Fed to announce in Sept. tapering of QE to ~$65b/mo. from $85b/mo., with $10b taken off MBS and Treasuries each, followed by another similar reduction later.
"Here's the problem. Some of the economic data is not improving. If you taper off now and we don't have economic strength, the economy is likely to start to slip into a recession quickly. There are also questions of whether the Fed has reached the limit of its abilities to purchase bonds, and why the boost to asset prices hasn't translated into the real economy. Clearly, there's a broken transmission system."