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Fed expected to continue tapering

Analysts say it is almost certain the US Federal Reserve will cut another U$10 billion out of its monthly bond buying program despite the uncertainty taking place in emerging markets.

SINGAPORE: Analysts say it is almost certain the US Federal Reserve will cut another U$10 billion out of its monthly bond buying program despite what is happening in emerging markets at the moment.

According to data, analysts say the United States has every justification for another paring back of its now US$75 billion a month stimulus program.

The most significant development has been in unemployment which dropped to a five-year low of 6.7 per cent in December.

Other indicators including housing, manufacturing and retail sales look healthy too.

Economists say they don't expect much market reaction to another tapering announcement because the Fed has been offering clear forward guidance, signalling it will continue cutting stimulus by US$10 billion each month until the program expires.

Outgoing Federal Reserve Chairman Ben Bernanke, however, did say tapering could be stopped and restarted at the Fed's discretion and is dependent on economic data.

However, if the Fed doesn't continue tapering, it could be a very different story.

Richard Jerram, chief economist at Bank of Singapore, said: "If you start tapering and then back away from it, at the very second meeting, you're going to send a really negative message to the markets about your time horizon of your policy decisions, so I think they'll be tremendously reluctant to turn away at this point."

The Federal Reserve announced on December 18 that it would begin scaling down its stimulus program by US$10 billion to US$75 billion a month.

One thing that's not expected to sway the Fed is the rout seen across emerging markets in the past week.

Economists say tapering has been partly to blame but the selloff has more to do with countries' individual problems.

Mark Matthews, head of research (Asia) at Julius Baer, explained: "There are a lot of moving parts. First of all, there's politics. Ukraine and Thailand are on the front pages. Right now, the markets are choosing to focus on the faults. They're focusing on the current account deficits in a few of these countries."

Weak numbers out of China are also adding to the mix.

When the Fed meets on January 28, it will be Bernanke's last meeting at the helm before handing the reins over to Vice-Chair Janet Yellen.

Yellen has been at the doveish end of Fed policy makers over the years so it is expected to be a smooth transition

Mr Jerram said: "I think from Asia's point of view, it's a good thing because it does, at least at a time of stress and uncertainty, reduce the risk of something going wrong."

And with markets slumping across Asia-Pacific, the last thing they need is more uncertainty.

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