Are economic reports finally indicating an acceleration in the economic recovery - or not?
Markets need to know. Investors need to know. Most importantly, the Fed needs to know.
The prognosis changes from month to month, even week to week, and this week even day to day, as expectations for Fed action move from taper on, to taper off, to taper on and back again.
The minutes of the Fed's last FOMC meeting, released this week, confirm that the Fed believes it must begin to taper back its stimulus soon. At this point, the longer QE continues the greater the risk of asset bubbles forming, the bursting of which would destabilize the economy and make it even more difficult to exit.
Economists and analysts have been concerned from the beginning about how the Fed would be able to reverse the massive QE stimulus, which has been the major driving force of the anemic economic recovery and the powerful bull market in stocks, without also reversing the momentum of both.
There are legitimate worries for the short term regarding the government debt, like how Washington will handle its next chance to agree on a spending bill and raise the debt ceiling.
But the long-term fears regarding the debt can probably be filed away in the archives along with the other doomsday scenarios of 2008.
It's not Hamlet who is providing theatrical intrigue in the financial markets, but rather Federal Reserve Chairman Ben Bernanke. Watching Bernanke decide whether to taper or not to taper the $85 billion in monthly bond purchases (quantitative easing) is similar to viewing an emotionally volatile Shakespearean drama. The audience of investors is sitting at the edge of their seats waiting to see if incoming Fed Chief will be plagued with guilt like Lady Macbeth for her complicit money printing ways or will she score a heroic and triumphant victory for her hawkish stance on quantitative easing (QE).No need to purchase tickets at a theater box office near you, the performance is coming live to your living room as Yellen's upcoming Senate confirmation hearings will be televised this upcoming week.
Fed tapering will be a legitimate worry in a few months, but should not be yet.
Analysts and economists have been concerned for almost five years now about how Fed Chairman Bernanke would ever be able to manage a successful exit from the Fed's massive QE stimulus efforts.
But markets have not been concerned since the summer of 2011. At that time QE2 was scheduled to expire at the end of June, and the Fed allowed that to happen. The S&P 500 topped out in May, 2011 and plunged 19% to its October low. The Fed has not taken such a risk since.