Wilkinson notes simply, “The economy is better positioned than it was at the time QE3 was announced 15 months ago.”
He does point out that a tapering is not the prevailing wisdom as, “Two-thirds of analysts surveyed by Bloomberg predict that the FOMC can afford to wait before announcing a reduction in the flow of monthly purchases.”
Last week's budget deal by the House that was advanced by the Senate on Tuesday took away one significant impediment to a possible taper.
Wilkinson bases his outlook partly on the release of the updated Summary of Economic Projections raising the odds of the first albeit delayed move from the Fed.
Supporting this argument Wilkinson notes, “We expect the inflation profile to remain soft. We anticipate that recent reductions in the unemployment rate will offer more bullish views from the committee over how unemployment will improve over the next two years. But we equally anticipate that the most important feature of the December meeting will be the transition from buying prowess to its forward guidance.”
He cautions, however, “A lower trajectory for both bond purchases and the rate of unemployment say nothing about the path of short term interest rates.”
Supporting his outlook is the strong, 22.7%, rise in housing starts for November to go along with other recent positive news. The spike in housing starts catapulted the annualized level of starts to its strongest reading since February 2008 (see chart).
On the overall impact of today’s expected news, Wilkinson says, “We expect declining volatility to accompany rising equities (CME:SPH14) supported by lower yields (CBOT:ZBH14). We may not get that today, but as the balm flows from the Fed, expect investors to figure out the Fed’s declining presence in the bond market will ultimately be supportive for the economy. The Fed is not trapped in its bond buying program, while massaging expectations about the pace of future monetary tightening will lead investors to conclude that bonds are indeed a bargain.”