Tomorrow the world finds out whether the Fed will begin to taper its QE program, currently at $85 billion per month in Treasury and MBS purchases. As we’ve discussed before, given the lower-than-expected budget deficit this year (in many ways attributable to non-recurring tax receipts from Fannie and Freddie, and capital gains from those that wanted to lock in lower rates), the taper was bound to happen – at least temporarily – since there would not have been enough “safe assets” to go around for all Tier 1 collateral needs if $85 billion stayed at $85 billion. At the same time, the Fed – and, specifically, Bernanke as he readies to leave the scene – wants to make a token gesture towards the notion that these programs are without end.
All of which is to say, I think the move will be small and eventually undone. With Janet Yellen anticipated to take over next year, there is no reason to believe that the Fed will turn hawkish – moreover, the budget deficit is not set to continue shrinking and the economy (and job growth) is anemic. What that means for any particular asset class in the near-term, your guess is as good as mine. Over a longer time horizon, though, I think the consequences are inevitable.
So, in the spirit of making a prediction, look for a $15 billion taper concentrated on the Treasury allocation.
