US Fed Likely to Cut Stimulus by Further $10bn Despite Emerging Markets Chaos

The US Federal Reserve is expected to reduce its massive stimulus further despite the turmoil in emerging markets and disappointing job growth at home.

In his last policy meeting as the Fed chief, Ben Bernanke and other top officials are expected to reduce the central bank's bond repurchase pace by a further $10bn (£6bn, €7.3bn), citing the overall improvement in the US economy.

The Fed would cut monthly purchases of treasuries and mortgage-backed securities by $5bn each bring total monthly asset purchases to $65bn.

The $85bn stimulus was cut by $10bn at the Fed's earlier meeting.

Continuity and Stability

The recent market turbulence in emerging markets that resulted in a significant selloff of assets by investors has fuelled speculation that the Fed will not go for a further reduction in its stimulus. In addition, US payrolls numbers in December remained poor.

Nevertheless, some analysts expect that the central bank would go ahead with its decision to gradually scale back the asset purchases.

"The Fed will be keen to give the impression of continuity and stability in its policy making. Deviating from its widely-anticipated course so soon, especially when the US economic outlook has brightened, would probably put its credibility at risk," said analysts at Capital Economics.

Following uncertainty about the timing of tapering in the second half of last year, a sudden change of mind from the part of the Fed would cause additional jitters among investors, according to them.

They added that the stock markets and the treasury market will not be adversely affected with a further reduction in stimulus.

Speaking about the turmoil in emerging markets, the analysts noted it is up to the central banks of those countries to address the negative impacts of the tapering.

In response to the situation, India unexpectedly raised its repo rate on 28 January.

Adding to the case for tapering, other indicators of economic growth remained strong in the fourth quarter. The unemployment rate fell to only 6.7% at the end of last year and manufacturing activity picked up.

According to the Case-Shiller 20-City index, house prices increased by a seasonally-adjusted 0.9% m/m in November. Despite the severe winter weather, the Conference Board measure of consumer confidence rose to 80.7 in January, from 77.5.

The payroll numbers are expected to have been distorted by the unusually severe winter weather.

The Fed's current balance sheet, released last week, shows that it now holds $1.66 trillion in US treasury bonds, and $926.7 billion in mortgage-backed securities.