QE - THE TAP HAS FINALLY BEEN TURNED OFF

By Ruma Dubey

Mark this day. 29^th October 2014 is the day when US Federal Reserve which had started on a massive bond buying or money printing stimuli of a staggering $85 billion per month since December 2012, has finally come to an end. The tap has been turned off, finally.

One could say that this marks the end of ‘this’ Quantitative Easing (QE)’ but this concept is here to stay; many say that we could see even Europe adopt a similar tactic as QE, as per many, has proven to be a successful stimulus. Began in 2012, the perception is that it is QE which has helped lower interest rates, helped boost employment. At a time when the highly debatable austerity program of Europe has fallen flat, while QE has achieved its objectives, naturally, today there are more supporters of QE – it’s a last resort in times of acute economic crisis.  Yes, this has been arguably the best experiment of the new age for resolving an economic turmoil.

This was a much expected news and on the interest rate front too, no surprises there too; rates are intact at near zero percent for a "considerable time" after the bond buying ends. Though it continues to link rates to unemployment rate and inflation, despite upgrading its labor market view, it has today given no indications as to whether it will raise rates before mid-2015. But this is good news as it goes on to actually show Fed’s confidence in the US economy, especially when we are not hearing anything optimistic from neither China nor Europe.

A quick look at the highlights of today’s FOMC meet:

• Bond buying has stopped but it will continue reinvesting the proceeds of securities that mature each month, keeping intact it’s more than $4 trillion balance sheet for now.
• Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability.
• The Fed did not give too much weightage to concerns on Europe, forex market volatility and weak inflation headwinds.
• It pointed out strengthening labor markets and said that slack in labor markets was "gradually diminishing."
• Rates would remain low for a "considerable time" following the end of the bond purchases this month.
• Timing and pace of rate hikes would depend on incoming economic data.
• It stated that likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.

The Indian markets are surely going to like this statement as there was no untoward surprise in store. Plus, the Fed’s statement was actually sounding more bullish not dovish as many had anticipated. This change in tone will be well received by our markets.  Now that this suspense is out of the way, it will once again be stock-specific action, based largely on their Q2 performances. The big results to watch for 30^th – amongst many, ACC, Ambuja Cement, Bharti Airtel, Ceat, ICICI Bank, IDFC, HCC, Maruti, Titan and Yes Bank.

All eyes will now be on Europe and its economic turmoil. The big question – will Europe start its version of QE to avert recession and deflation?