For The First Time In Ages, People Are Talking About The Fed's Punch Bowl Getting Taken Away
But for the first time in a long time, people are really talking about the Fed "exiting" ultra-easy monetary policy in a serious way.
In her latest edition of Top Client Questions, SocGen's Michala Marcusen reveals that the #1 issue atop investor minds concerns the Fed removing the so-called "punch bowl":
WHEN WILL THE FED END QE? The FOMC has kept guidance on asset purchases deliberately vague but termination is tied to a significant improvement on the employment outlook. FOMC minutes last week showed a wide range of views on when conditions for ending asset purchases might be met; (1) "a few" viewed end 2013, (2) "a few" gave no timeframe but noted the need for ‚considerable? accommodation, (3) "several" said well before end 2013 and (4) one (Lacker) was against any additional purchases. With the Fed quite evenly split on the asset purchase timeframe, the final agreement on the automatic spending cuts (due to be decided by end-February) will be an important determinant. Our new growth forecast for 2013 of 2.4% assumes that half the spending cuts ($55bn) will be implemented. This, in turn, should allow the Fed to bring about an additional $1.1tn of additional QE over the coming year. Risks that QE could end earlier, however, have increased. The end of this week will see the Fed’s Bullard, George, Kocherlakota and Plosser speak on the US economy. MARKET ISSUES: QE demand, stall-speed growth and low inflation acted as a triple-anchor on Treasury yields in 2012. Our expectation is for yields to now track gradually higher as sustainable recovery takes root in the US, but with still low inflation and high unemployment promising additional QE. The balance of risk, however, is clearly shifting to the upside for Treasury yields and the US dollar.
This concern echoes what Citi FX analyst Steven Englander talked about in a note this week, that there are concerns about a "1994"-style move, whereby the Fed tightened before people expected, and bonds get pulverized.
The long-end of the yield curve (yields on 10 to 30 year bonds) has been moving sharply higher lately, and as Marcusen notes above, that should be dollar bullish.