MONTHS of anticipation will come to an end this week when the Federal Reserve finally says whether it will start to rein in its massive stimulus of the economy, which has flooded financial markets with some $2.75 trillion over the past five years, supercharging returns on everything from stocks to junk bonds.
But for all the concerns that the reduced presence of such a giant asset buyer would be calamitous for investors, it appears equity and bond markets are poised to take the Fed decision largely in stride – provided the central bank doesn’t surprise with the size of its move or shock in some other way.
The Fed has signalled its intentions to pare back its monthly purchases of $85bn in bonds at its two-day meeting that ends on Wednesday. Recent data has been mixed, with August jobs and retail sales data falling short of expectations. Consumer sentiment has fallen, partly due to rising interest rates.
Emerging markets were hardest-hit once the Fed started to lean towards cutting stimulus, with sharp selloffs in debt and equity markets globally. Some markets have recovered some losses, but investors have hedged against any Fed shock that could hit markets.
While the Fed will be the primary market driver this week, investors will also look to quarterly results from FedEx, viewed as a proxy for economic activity, and software giant Oracle. The market will also see data on August housing starts and existing home sales, and the monthly Philadelphia Fed business index.