After months of speculation regarding the likely timing of tapering, it finally came, with the Fed withdrawing $10bn in stimulus which is set to begin next month. Although not many economists predicted such a move, the announcement failed to trigger any significant movement, and both equities and emerging markets weathered the storm quite well.
The Fed has successfully convinced the market that tapering should not be confused with a tightening of policy. An adjustment to forward guidance reinforced this point, with the bank stating that loose monetary policy will remain, even after unemployment has reached 6.5%. A mere $10bn reduction in stimulus is hardly substantial and this may be part of the reason why equity and emerging markets appear unmoved by the news.
The day that the markets had been dreading seemed almost like a non event. Some might argue that this is a positive thing. We witnessed the effects taper talk had on the emerging market currencies with the Indian Rupee being one of the worst victims of a selloff. This suggests that all the speculation and the delay between September and December prepared the markets well for what was coming, unlike last summer when the markets were caught off guard.
Sasha Nugent
Currency Analyst
