The big question is, is the American economy strong enough to begin reducing a key stimulus program?
The recovery looks stronger than in September, when the last Fed meeting took place. The economy added nearly 200,000 net new jobs a month. The unemployment rate is down to 7 percent, from 7.6 percent in June.
It also looks different than during October’s shutdown: the recent deal in the U.S. Senate about the coming budget will prevent more halts for the next two years and lessen fiscal uncertainty.
Inflation has been low. For the 12 months ending in November, prices have increased 1.2%. That is well below the Fed’s target for 2% annual inflation. And several Fed officials have shown concern in the last weeks about prices rising at an unusually slow pace. Also, consumer price index was flat in November, as expected, following a 0.1% drop the previous month.
But there are also arguments against the tapering:
A couple of months of bright, correct economic data are not enough to stop the QE, many argue. More evidence is needed.
Inflation is still way too low and start winding down the bond-buying program may cost the Federal Reserve’s credibility. Investors could panic about a Japan-like inflation scenario.
Although Bernanke will still be the Fed’s chairman until January 31, the current vice-chair Janet Yellen is expected to follow his steps, so technically this changes nothing.
Nobody knows when nor what the reaction to the tapering will be. Are investors too used to the cash steroids to react calmly, no matter what happens?