- POSTED: 17 Sep 2013 23:45
This graph is an experimental feature that tracks number of views over time.
All eyes are on the United States this week as the Federal Open Market Committee meets to discuss the future of its US$85 billion-a-month bond-buying programme.
SINGAPORE: All eyes are on the United States this week as the Federal Open Market Committee (FOMC) meets to discuss the future of its US$85 billion-a-month bond-buying programme.
Markets have braced themselves for taper-light but some economists are not convinced the US economy is ready for a cutback.
Bank of Singapore’s chief economist Richard Jerram said: “We think they will start to taper.”
But David Carbon, DBS Bank's managing director (economic & currency research), said: “I think it's completely up in the air.”
Economists remain split on whether the US Federal Reserve will announce a scaling back of its loose monetary policy this week.
Some economists said the indicators that the central bank put in place -- those benchmarks proving that the US economy is strengthening -- aren't there.
They pointed to weak non-farm payroll numbers, which are far below the 200,000-a-month mark, and unemployment.
August's job numbers were weaker than expected, with non-farm payrolls increasing 169,000, down from 180,000 in July.
And while unemployment ticked down to 7.3 per cent in August, compared to 7.4 percent in July, it's mostly due to Americans dropping out of the workforce. The labour force participation rate dropped to 63.2 percent - the worst reading in 35 years.
Mr Carbon said: “Take out the labour markets, GDP (gross domestic product) is running. If you look at it as year-on-year terms, it's running at 1.6 per cent. That's half of what it was running at when QE3 (quantitative easing 3) started.
"Consumption is slower than it was when QE3 started. Business investment today is running half of what it was when QE3 started. Inflation is lower today than when QE3 started.”
If a cutback is announced, economists expect it to be a modest one -- somewhere between US$10b and US$15b a month.
This amount is something markets can easily digest, so experts are not expecting much volatility, even from countries straddled with large current account deficits like India and Indonesia.
In May, markets plummeted after Fed Reserve chairman Ben Bernanke hinted at a cutback.
Mr Jerram said: “Both of those countries have responded to this pressure by basically offering higher interest rates to keep on attracting foreign capital. The economic fundamentals, especially for Indonesia, aren't that bad. And I think as a result, there hasn't been a contagion across different countries like we saw 15 years ago.”
Also up for discussion this week is the other half of the QE3 equation: interest rates.
Economists said the Fed needs to offer some clear forward guidance on when rates could start going up.
Mr Jerram said: “At the moment, the markets are thinking they'll go up at the end of 2014. According to the Fed's forecast, it doesn't look like it should happen until mid-2015. So there's a gap there.
"And that gap has damaging economic consequences. For example, it raises the cost of mortgages, slows down the housing market, slows down the economy.
However, until Bernanke takes the podium later this week, it all remains speculation.