The Fed is sign posting a near term taper, perhaps as early as next month, according to the October FOMC minutes released mid-week. The market has always been under the impression that tapering was data dependent. However, this may not be wholly accurate. Reading between the “transparent” lines its been suggested that US policy makers are very keen to pull back on liquidity, reducing their $85b a month bond buying program, even without an improvement on the US job front.
If one digs deeper it becomes obvious that the Fed is already discussing “concerns about the efficacy or costs of future asset purchases.” The main hurdle that the Fed members have had to over come is all to do with communicating their intentions very clearly to the market. Yellen, Bernanke and company has constantly been repeating, verbatim, that to “taper is not to tighten.” US short-term interest rates are expected to remain low for the foreseeable future. Collectively if they believe that they have adequately got this message across to the investor masses than there is no reason why tapering could not start as early as next month. The fixed income dealers will tell you that the steepening in the US 2’s/10’s curve would suggest that Capital Markets collectively have got the Fed’s message which gives them the green light to proceed with tapering under a ZIRP environment.
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