Week in FX Americas – To Taper – The Hill and NFP to Decide

The pace of recovery in the U.S. is at best softer, but not precarious as it is in Japan, or regionally uneven as it is in Europe. The bigger question is about economic sustainability, and that has been clearly answered by the Federal Reserve with its dramatic “no taper” move this month.

Blindsiding most capital markets, U.S. policymakers refrained from adjusting their $85-billion monthly bond buying of Treasurys or mortgage-backed securities. In doing so, the Fed cited various reasons from the political standoff on Capitol Hill to concerns about longer-term interest rates rising. U.S. bond yields have been backing up ever since Fed chief Ben Bernanke announced last May, under the guise of better communication and transparency, that reducing market liquidity, or QE3, would soon be a part of that equation.

To Bernanke’s credit, he never once suggested a liquidity tightening event commencing time schedule; the market took it upon itself to price in a reduction in liquidity in September. Mind you, no U.S. policy member ever went out of their way to dissuade capital markets that a token taper would commence in September. However, we have heard a few Fed heads imply something different this week.

Any future notion of tapering will in all likelihood become a meeting-to-meeting call once again, beholden to a handful of economic data points, market developments, and most certainly a safe passage through U.S. fiscal legislation.

The Fed is correct to be hesitant at this juncture however. Global growth is shaky at best, and turning the liquidity taps too tight too soon, would have a huge global domino effect. U.S. data is proof that there is no need to tighten liquidity just yet. Personal consumption and corporate spending remains an issue. North American domestic and global inflation is a non-issue. Cheap credit has yet to consistently filter through the ‘system’ and promote stronger economic growth. There is no housing boom in North America, there is a flood of cheaper houses, but the lack of higher disposable incomes and new jobs are not consistent. Corporations are not hiring en masse, they are concentrating on increasing productivity and not spending. Even for consumers the access to cheaper credit has become more constrictive over the last few years because of tighter regulation. Perhaps next weeks NFP could paint a clearer picture for investors.

The American economy may be heading toward another “fiscal cliff” crisis if the U.S. government hits its debt ceiling in mid-October instead of December. This time, there is no back-up plan. Now that the Fed’s taper decision is out of the way and Bernanke is pointing a finger at Capitol Hill, a repeat of last winter’s shenanigans between the Democrats and Republicans will be to blame.

• Fed Members Agree Better Signalling Policy Needed
• Kansas Fed President Agrees First Taper Will Be a Token
• Kansas Fed Chief Urges Fed to Start Bond Tapering
• Bill Clinton Warns Policymakers About Using Debt Ceiling For Political Gain
• Plenty of Issues keeping the U.S. Dollar Steady
• UBS Cuts Recommendation on U.S. Dollar to Neutral
• 61% of Americans Want To See Spending Cuts
• Ex-IMF Official Agrees Market Focusing Too Much on Fed
• Hedge Funds Support Tim Geithner for Fed Top Job
• Economic Survey Shows Americans Pessimistic About Economy
• US Pending Home Drop 1.6 Percent in August
• US Jobless Claims Drop to Six Year Low
• US Data Boots Stock Market Political Drama Still on the Radar
• Disappointing Demand for U.S. Capital Goods
• Three Weeks and Counting – U.S. needs to raise Debt Limit
• Productivity In US to Increase As Wage Gap With Emerging Markets Narrows
• US Treasury Secretary Warns Republicans Government Cash Will Run Out October 17
• Perhaps Fed Taper is Miles Away
• US Home Prices Grow At Slower Pace in July
• Fed’s Lockhart Says US Mojo Triad Not Growing
• Dr Doom Optimistic About US Economy
• Peter Schiff Says Fed Is Trapped Can’t Taper
• Fed’s Fisher: Selecting Chair should not be a Public Debate
• US Factory Slowed in September
• Moody’s Forecasts Cost of US Government Shutdown
• Fed Policy Maker Defends No Taper Decision
• Obama: No Compromise On US Debt Ceiling
• Buffett: Fed is Greatest Hedge Fund Ever Seen
• Markets want Bernanke to Stay, perhaps …

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