The global markets will be focused on the announcement from the FOMC this Wednesday, says MoneyShow's Jim Jubak, who shares his view on what may happen.
For the week ahead, what could there possibly be to think about? End of the baseball season?...Oh yeah, the Federal Reserve. The Federal Reserve has a two-day meeting that begins on Tuesday, the 17th of September. It goes to the 18th of September. On the 18th, it's a meeting of the federal open markets committee; that's the committee that sets monetary policy. The big decision is taper or not to taper. The question is whether the Fed will think the economy is strong enough so the Fed can start cutting down on its monthly purchases of about $85 billion worth of treasuries and mortgage-backed securities. They've been doing this to keep loan amount, sort of, mid-term, seven-year rates down to support the mortgage market. At some point, they have to stop.
They can't keep adding $85 billion to even the Fed balance sheet forever without it having some ripple effect in the larger global economy, and the worry that's been roiling the markets; mostly emerging markets, strangely enough, has been that the Fed will start to taper at this meeting.
This has driven interest rates up on the 10-year, so that it's moved up to about 100 basis points; one percentage point in the last year to close to 3%. The worry then, of course, is that interest rates will be high enough to slow the economy, blah, blah, blah, blah. This is really what the market is thinking.
The issue that the market has been trying to figure is, the Fed has said this decision is going to be dated dependent, so the market has been focused on what the data shows, and trying to guess what the Fed is making of this data. In the week before the meeting, really, what we're seeing is that the market has decided the economy may be weak enough so the Fed is not guaranteed to start to taper.
I think if you look at the calendar going forward, it's pretty clear that this is one of the best times, either September or October. I think September is better, just in terms of politics, and what's on the schedule for the Fed to begin taper. That's because you have a big political clash, with Washington coming up over the federal budget. There is no federal budget for the year that starts on October 1.
You have the debt ceiling battle. I think the Fed would like to avoid all of that and have something in place, before all of that gets a chance to make the market kind of crazy. I think the likelihood is that the Fed will indeed taper. I think the likelihood is the Fed will taper a relatively small amount. The consensus, right now, is that we might go from $85 billion a month to $75 billion or $79 billion a month. It's not going to make a huge difference to the economy. I think the likelihood is that when that happens, Wall Street will go, "Oh, so that's what we were worried about?" and pass this off and then they'll move onto the next crisis. I think the next two crises are over the budget and the debt ceiling, are indeed going to be a lot to this last year, and we're destabilizing with this one, but this is my read of what the market is going to be looking for over the next week. Really where attention and market movement is going to come from.
This is Jim Jubak for the MoneyShow.com video network.