US Federal Reserve “has tightrope to walk”

US federal reserveInvestors are anticipating tomorrow's interest rate decision by the US Federal Reserve in case it gives more clues about when the central bank will begin to end its quantitative easing programme.

“Since June, when the US central bank first hinted at the possibility of tapering, financial markets have in effect hung on its every word while trying to decipher its most likely course,” says Joe Dyer, a senior fund manager at UK-based wealth manager RD Signature.

Dyer says an equal amount of attention has been focused on economic data, particularly unemployment and inflation, the two key metrics on which any decision will be based.

Dyer notes that “unprecedented” central bank measures have brought bond yields down to arguably artificially low levels.

“Consequently, the concern is whether the economy is able to stand on its own feet without the heavy support the central banks have provided,” he says.

“Here the Federal Reserve has something of a tightrope to walk: withdraw too early and risk undermining the recovery, leave it too late and risk asset bubbles and higher than desired inflation.”

Fitch Ratings, which recently surveyed fixed income managers that manage a combined €5.6 trillion, found that investors see the risk of winding down monetary stimulus as a big challenge.

However, 73% of those surveyed also say they expect central banks will tighten policy without threatening the economic recovery.

A majority of investors (66%) expect such concerns to drive volatility in emerging market bond fund flows for the remainder of this year. About a fifth says flows will decrease due to greater concerns over political risk.

Fitch Ratings conducted the survey between July 1 and July 31.

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