After Friday’s disappointing sentiment and retail sales data, alongside earlier reports showing struggling jobs growth, some questioned if the Fed can justify tapering QE at tomorrow’s meeting. But PPI indicated that inflation is non-existent leaving few reasons not to cut back. The short answer is that there is enough growth to survive cutting back asset purchases and as stated here previously, concerns over growth are likely to keep a lid on yields, with rising yields being one fear about the end to asset purchases.
Leaving tapering to later in the year only pushes it closer to current Fed Chairman Ben Bernanke’s departure and possibly forces the size of each cut to increase which may indeed push yields higher. Who wants to ruin the U.S. peak holiday retail period by being the Grinch? All of which may leave the Fed taking less than $10 billion a month out of the current $85 billion a month purchase program but even that would be enough to show the process has begun. The Fed's two-day meeting begins today with the announcement tomorrow. Expect dollar trading to consolidate and volume to drop the closer we get to the announcement.