Is the Fed Likely to Change Policy?

Focus is on the December 18 FOMC meeting, says MoneyShow's Jim Jubak, as investors are wondering whether the economy is strong enough for the Fed to change course.

Everybody is trying to guess what the Fed will do on December 18. It is the next meeting of the Federal Open Market Committee, the one that is going to decide whether the Fed is going to start to taper its $85 billion a month in asset purchases in December, or later in January, or maybe March. Market consensus is still probably pointing toward March, but there is now enough nervousness that some people are bidding on January, and it is why, in the run up to the December 18, you get a lot of jumping around in the market.

The problem here is that we are trying to guess two things. One is we are trying to guess what the fundamentals are going to be. When an ADP comes out and shows that you have seen private sector job growth of about 200,000 and the expectations were only for about 188,000 for November, that makes people go, “Oh, okay, so the Fed is going to see this and decide to move.” Well, the question of how this translates into economic growth across the economy is still wide open, so we do not know exactly what this means for a growth rate.

The second thing we are trying to guess, and this is probably the harder thing, is really, we are trying to get inside the head of the Federal Reserve outgoing Chairman Ben Bernanke and incoming Chairman Janet Yellen, and basically go, “Okay, so what would they need to see to start to taper.” It is very clear that the Fed would like to start to reduce this, to move a little bit back out of the market, to not keep adding $85 billion a month to its balance sheet, but what do they have to see, to be sure that by withdrawing some of the stimulus they are not going to make the economy slow and then maybe tank. That is a really open question. The Fed has been trying to communicate some guidelines, but not really done a very good job at it. They have been saying, “Well, we want to see evidence that job growth is picking up or is sustainably high and what does that mean.” You know we are getting about 200,000 right now, as we got in November. It is not clear that is enough. We are not seeing inflation and that is a sign that maybe they do not feel a need to do the taper, because that stimulus is not really producing any inflation in the economy.

What we really have here is—until it happens—we will not know what is going to happen. Every time we get to a decision point like the December 18 meeting, the markets get really nervous. Everybody decides to hunker down, in one way or another, and usually, that means taking some profits and selling off some stuff, but nobody really wants to get totally out of this market, just in case the Fed does not do anything until March. Then you would have to rush right back because it is still the Fed's game for the US stock market.

This is Jim Jubak for the Money Show.com Video Network.