This week, we should finally get clarity on the issue that
investors have been obsessed with since May
: when and how the Federal Reserve (Fed) will start to adjust
My best guess is that the Fed will announce a modest
what I'm calling a "taper lite"
, in the size of its monthly asset purchase program at its
meeting this Wednesday. I foresee the Fed saying that it will
begin reducing its monthly asset purchases by $10 billion to $15
billion. That would lower its total monthly asset purchases to a
range of $75 billion to $70 billion.
Why don't I expect a larger reduction? As I write in
my latest weekly commentary
, there are two reasons I expect a gradual taper:
The almost total lack of any inflationary pressures
outside of oil.
The Fed has considerable latitude to go slowly as inflation
remains contained, most evident last week in August producer
price data. If you take out the more volatile food and energy
producer inflation fell to 1.1% year-over-year
, the lowest level since the summer of 2010.
The US economic recovery is still uneven.
Job growth has not accelerated and as a result, both wages and
consumption remain soft, as evident in
August's relatively weak retail sales data
. Of even more concern is the housing market. The low rates
that have fueled the economic recovery are becoming a thing of
the past. Mortgage rates are now at 4.8%, up from 3.5% in May,
and the higher rates have already had some negative impact on
housing activity and have eviscerated the refinancing market.
Given the dynamic between interest rates and housing, the Fed
will want to prevent too steep of a rise in yields lest this
put the housing recovery in jeopardy.
So what does this mean for investors? Markets
are likely to remain volatile in the near term
as investors will be closely watching for any qualitative
guidance around when the Fed intends to raise short-term rates.
However, in terms of tapering I believe that the impact of a
gradual reduction in the rate of monthly purchases is already
reflected in bond prices. This suggests that absent stronger
long-term rates are likely to be contained for the foreseeable
. This backdrop presents a couple potential near-term
opportunities for tactical investors with a short-term
Consider high yield bonds
which would benefit
from an environment of stable rates and a slowly improving
Consider emerging market (EM) equities
. This asset class
suffered in recent quarters
as higher rates and a stronger dollar have put pressure on many
of the EM currencies. A more stable rate environment, however,
suggests better performance for EM equities
Russ Koesterich, CFA,
is the Chief Investment Strategist for BlackRock and
iShares Chief Global Investment Strategist. He is
a regular contributor to
and you can find more of his posts