On the eve of the Federal Reserve Chairman Ben Bernanke presiding his last Federal Open Market Committee meeting, which wraps up this Wednesday with a press conference, a growing number of hedge fund traders who operate along the yield curve are anticipating Bernanke to announce the beginning of the end of quantitative easing.
What is behind the tapering talk? It could be about more than just a positive jobs number.
While a robust jobs market was a prerequisite for a taper, two other behind the scenes factors could come into play. Bernanke has been praised but also widely criticized for the unconventional bond purchasing program. Many economists and professional investors have said the Fed does not have an a workable exit program for quantitative easing and the program is suppressing the free markets role in price discovery. To this end, Bernanke announcing the end of the program as he leaves office is expected to place in the history books the fact Bernanke started and began the exit process, something he is said to want tied to his name.
The second reason to taper in December is more practical. With equity markets dropping at the mere whiff of tapering talk, announcing the end of the program during the holiday season – a traditionally bullish period of time for stocks with many professional traders not as active – could be the ultimate period of time to taper as it could lesson potential negative market impact.
If the Fed does not begin the actual taper in December, hedge fund traders expect some definitive indication that the program will begin to be announced at the press conference this Wednesday.
What will the exit of the Fed from the interest rate market do to interest rates? While many hedge fund traders say the yield of the ten year note could quickly rise to 4.75%, Feuerstein expects the yield to top out at 3.60%.
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