* Fed statement to count as much as pace of stimulus
* Central banks, markets have no guide to what might unfold
* Potential for yield volatility to rock confidence
By Alan Wheatley
LONDON, Sept 15 So great is the Federal
Reserve's worldwide impact that exactly how the U.S. central
bank frames its widely expected decision to start buying fewer
bonds will be critical for the path of the global economy.
U.S. bond yields have surged since Fed Chairman Ben Bernanke
said in May that the policy-setting Federal Open Market
Committee could start tapering its asset purchases from $85
billion a month at the 'next few meetings.'
Despite assurances that the stimulus would be withdrawn
gradually and that interest rates would not rise any time soon,
investors have been pricing in a turning point in the financial
If yields shoot even higher after this week's Fed meeting,
confidence will be rattled, the already feeble housing-driven
U.S. recovery could stumble and investors in emerging economies
might again start rushing for the exit.
What's more, U.S. monetary policy largely determines global
capital flows. So rising U.S. borrowing costs would make it
harder for the European Central Bank and the Bank of England to
convince investors through forward guidance that they are being
premature in bidding money market rates higher.
Claudio Borio, director of research at the Bank for
International Settlements in Basel, said the increased
sensitivity of markets to changes in the monetary policy outlook
had prompted central banks to adjust the way they communicate.
"But there are limits to how far good communication can
steer markets. Those limits have become all too apparent," he
While yields must rise eventually from levels that are still
historically low, no one knows how disorderly the process might
be and even less where those yields will settle, Borio said.
A particular risk was of a 'disruptive unwinding' of
financial imbalances in countries that have experienced
unusually strong increases in private sector debt.
"History does not offer any good guidance as to what will
happen," Borio said on a conference call to present the BIS's
BIG DECISION, BIG STAKES
In short, a lot is riding on Wednesday's FOMC statement and
news conference by Bernanke.
The consensus is that the Fed will initially reduce its bond
purchases, now $85 billion a month, by $10 billion or perhaps
A batch of housing data this week is likely to reinforce the
case for caution. Housing starts will rise, according to
economists polled by Reuters, but building permits and existing
home sales are forecast to dip.
Luca Paolini, chief strategist with Pictet Asset Management
in London, said he expected a dovish Fed statement, especially
in light of August's soft jobs report. What's more, some FOMC
members might vote against any tapering at all just yet.
"But there's always an announcement effect, which in this
case could be especially powerful because we are moving from
free liquidity for all to a landscape where a lot of investors
have the perception that we're beginning a tightening cycle,"
A rebound in many emerging market currencies and stock
markets in recent weeks gives some analysts confidence that Fed
tapering is now priced in and that economic fundamentals, though
not great, justify scaling back stimulus.
"What we've seen in the last couple of weeks is a resurgence
of expectations on the positive side, mainly because some of the
leading indicators from the U.S., the euro zone and Japan are
signalling more positive growth momentum this year and into
2014," said Rajiv Biswas, chief Asia Pacific economist in
Singapore for IHS Global Insight, a consultancy.
And with China regaining momentum, east Asian exports should
start to rebound by the fourth quarter after two years of
softness, providing a platform for stronger regional growth in
2014, he said.
Julian Jessop with Capital Markets, a London research
outfit, agreed that winding down what has been an unprecedented
episode of monetary stimulus is fraught with risk.
"Nonetheless, the potential for Fed tapering alone to shock
the markets or derail the global recovery has surely now
diminished," he said in a report.