The possibility that the Federal Reserve could finally start to trim its extraordinary stimulus for the economy could make this week an explosive one for financial markets.
Though the odds still point to no major policy change when U.S. central bankers meet December 17-18, most of the recent domestic economic data suggest the beginning of the end of their massive bond-buying program is coming sooner than later.
If it acts it may reflect as much a growth in confidence in the global economy, for whom the withdrawal of the flow of cheap dollars will be a shock, as in the recovery in the United States alone.
Growth in jobs, retail sales, services and overall output in the world’s biggest economy – combined with last week’s breakthrough budget deal in Washington – has convinced some economists that the Fed will announce a reduction to its $85-billion a month in purchases on Wednesday.
While that could amount to a vote of confidence in the halting recovery from the Great Recession, the risk is that Fed Chairman Ben Bernanke’s message sets off a market selloff that undermines growth worldwide.
The question is whether more U.S. fiscal stability and some good signs out of Europe and Asia will convince key Fed policymakers that the U.S. economy can handle less monetary support, and that investors won’t overreact.