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Economy Jul 6, 2013

End of easy money? Fed may begin ‘taper’ in September

By Uttara Choudhury

New York: Better-than-expected jobs growth in the US in June makes it more likely that Federal Reserve Chairman Ben Bernanke will slow the central bank's bond buying program in September, rather than at the close of the year, said economists on Friday.

"Wake up and smell the taper," read the headline on a note to clients from Michael Feroli, chief US economist at J.P. Morgan Chase, referring to the likelihood the Fed would gradually reduce or taper the size of its bond purchases.

Noting that the June gain of 195,000 jobs was "not too shabby," Feroli said he now expects the Fed to slow the pace of its economic stimulus in September. Before the jobs report, Feroli had expected the Fed to do this in December.

Economists and investors have been watching employment data closely, with Fed officials pointing to the jobs outlook as a key element in any decision to scale back on efforts to support the economy.

"The Fed has made clear that at the end of the day, it is employment which will call the tune. Coming into today, our call for a December first taper was already probably a little underwater, and after today's report we are moving to a call for a first reduction in asset purchases at the September Federal Open Market Committee (FOMC) meeting," said Feroli.

Will 'Big Ben' strike in September? Reuters

Will 'Big Ben' strike in September? Reuters

"In one line: Good enough to sustain Fed intentions for fall tapering," wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.

According to 44 percent of economists in a Bloomberg survey, Bernanke will cut what is currently the Fed's $85 billion per month bond buying purchases by $20 billion at the September 17-18 policy meeting.

Goldman Sachs also penciled in a September slowdown in Fed bond buying, from December.

On June 19, Bernanke roiled markets with talk of a pullback in monetary stimulus. For the first time, he offered a timeline for winding down the Fed's $85 billion-a-month bond buying program later this year and ending it altogether by mid-2014. That sent a chill through global markets, including India as it signalled an end to easy money.

Foreign institutional investors (FIIs) withdrew a net $1.76 billion from Indian stocks last month through June 27 due to the expected pullback in Fed stimulus and a slump in the rupee to record lows.

Gold slides after strong US jobs data

Gold plunged nearly 3 percent lower on Friday to $1,212 as the dollar climbed on the back of stronger-than-expected US jobs data.

"After the strong US numbers, we are approaching the point in which the Fed will start to taper and as a consequence we fully expect that, if the US economy continues to improve, you will see a further strengthening of the dollar, which is negative for the dollar-denominated gold price," Natixis analyst Nic Brown, told CNBC.

Gold posted its biggest quarterly loss, down 23 percent in the April-June period, with selling heightened by Bernanke's comments last month that the US economy was recovering strongly enough for the Fed to begin tapering this year.

by Uttara Choudhury

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