All eyes on the Fed this week, as taper tension builds

Trader nerves are on edge as fears of US tapering - a reduction in the rate at which the Fed's balance sheet is expanded - persist ahead of Wednesday's Federal Open Market Committee (FOMC) announcement. At present the Fed is buying up to $85bn in bonds each month.

Markets have little to go on following remarks that Fed chairman Ben Bernanke has made about the possibility of tapering as early as this year. The FOMC is meeting today and tomorrow, and their moves are being closely monitored. As a result, speculation by Fed watchers Hilsenrath and Harding has been enough to shift markets in a big way.

SocGen's Kit Juckes summarises the "Taper see-saw":

Ben (Bernanke) said that if things go on improving he might taper sooner rather than later. John (Hilsenrath, WSJ), pointed out that this didn’t mean imminent tapering. Robin (Harding, FT) suggests that the Fed will not back off but action is dependent on the economy. Hilsenrath and Harding aren’t really very far apart but the reversal of recent trends (rising US yields, tumbling high - beta currencies, wider credit spreads) was put on hold.