Barely a ripple as the Fed meets

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Barely a ripple as the Fed meets

Unlike in the past, when a Fed meeting prompted jitters in the markets, the Seoul bourse and other stock markets across the globe were calm ahead of the two-day meeting that started yesterday.

Market experts say that in May, when the possibility of ending the Fed’s unprecedented quantitative easing was first mentioned, the Kospi and other global markets were caught by surprise and tumbled.

This time, many investors are aware that tapering may happen in the first three months of next year. Analysts say the impact on the global financial market that will follow once tapering starts will be limited, since there has been time to prepare.

In particular, the market is betting that the Fed might not start tapering until March, which would allow additional time for the U.S. economy to recover and will have a positive impact on other economies, including Korea.

“The improving economic indicators and easing anxiety over the political uncertainties [in the United States] have raised the possibility of the reduction of quantitative easing,” said Jeon Ji-won, an analyst at Kiwoom Securities. “However, the possibility of tapering the stimulus program as early as this month remains unlikely.”

The analyst said the biggest reason is low inflation in the United States.

“Aside from economic expansion, the other duty of the Fed is to stabilize inflation,” said Jeon. With U.S. inflation pressure low, he added, a contraction of its stimulus program could raise the possibility of deflation similar to the one Japan suffered for more than a decade.

According to the U.S. Bureau of Labor Statistics, the inflation rate in October was 1 percent, the lowest since minus 0.2 percent in November 2009.

“With such low inflation, reducing quantitative easing could reduce the speed of the economic recovery,” the analyst said.

Lee Eun-joo, an analyst at Daishin Securities, agrees. Lee said the possibility of reducing the asset-buying program was raised when the U.S. Congress reached a modest bipartisan budget agreement last week.

Lee said as the plan setting the federal budget for the next two years easily passed the House, the Senate will also make a similar move, which will eventually lead to ending quantitative easing.

However, the Daishin Securities analyst said some participants in the market expect the Fed to take such action after March, which will give enough time for the U.S. economy as well as other related markets to solidify and expand their gains.

But not all analysts agree that the Fed may hold back until next year on slowing the pace of its bond purchases.

Even so, some argue that the realization of the tapering might not have a huge impact on the global market as investors are already putting their hopes on economic recovery.

“Instead of being worried over the shrinking liquidity in the market, there is now more of a focus toward a recovery,” said Kim Sung-hwan, an analyst at Bookook Securities. “Regardless of the decision by the Fed, the market will head toward a single direction [of betting on an sustained economic recovery].”

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