How Close is the US to Tapering QE3?

Implications for Emerging Markets
Currently, there is much debate regarding the future of the massive Quantitative Easing (QE) program of key Central Banks, particularly the US Federal Reserves (FED); the European Central Bank (ECB); the Bank of England (BOE); and the Bank of Japan (BOJ). Of these, recent attention has been focused, particularly on whether the FED is considering a ‘tapering’ of its purchases of bonds and mortgages. ‘Tapering’ is the term used to describe a possible slowing down of the FED’s asset purchases which currently amount to $85 billion per month. This has led to selling by bond-holders thereby driving up interest rates and causing volatility in stock markets. The nervousness has not been confined to the US and has spread around the world. There has even been talk of an emerging market sell-off. If the mere possibility of the FED ‘tapering’ its bond purchases can cause such volatility, the prospect of it actually happening requires careful consideration. It would be useful, therefore, to examine some of the issues involved regarding the FED’s future action on its massive QE program. Any such analysis is complicated by two very different narratives that make it difficult to separate the good news from the bad.