The biggest talking point among traders for several months now has been “When will the FED start tapering?”. At least we know the answer now. Wednesday’s FED meeting announced a reduction in the amount of money being thrown at the market, reduced by $10bn a month from $85bn to $75bn.
This really is a symbolic gesture. In the overall scheme of things, a reduction of $10bn a month being pumped into the US economy is neither here or there. The economic output of the US economy is well over $15,000bn and growing strongly.
The other aspect of the FED announcement was not to expect any changes to interest rates anytime soon. This is a factor in most western economies at the moment – a strong growth in demand and GDP is not filtering through to prices. Interest rates are the weapon to slow demand and prices.
Until the growth in the economy starts to take up the slack capacity in the economy, we can expect interest rates to remain low. Once the threat of inflation looms, that is when we can expect real interest rates to rise.
For now, the FED has set the path into 2014. This has at least given the markets some direction. This should lead to a gradual strengthening of the USD against other currencies.
Now compare the US economy with Europe and the Eurozone specifically. Which one would you want to invest in? A stagnant economy trying desperately to come up with something to stimulate growth, or an economy that has already achieved that as an outcome. With that statement, it won’t take too much to work out where I figure the Euro is heading over the next few months.