What does a delayed taper mean for global markets?

The Federal Open Market Committee has put on hold its much-dreaded decision to taper the $85 billion bond buying programme announced last year. The rush of liquidity that has been fuelling the global markets will continue for some more time. After the hype and hoopla, the Fed has delivered a surprise, creating confusion galore. Economists and strategists of global brokerages believe the exit will be gradual and stretch over the next two years. So when will the taper begin? Flip a coin, say experts. Here’s what the experts have to say:

Kevin Logan and Ryan Wang of HSBC Global Reserach say: “The FOMC chose to delay tapering for four key reasons: mixed economic data, low inflation, tighter financial conditions, and near-term fiscal policy risks. The FOMC surprised financial markets today by deciding not to taper its purchases of longer-term Treasury and mortgage-backed securities."

Instead, the Committee said that it “decided to await more evidence that [economic] progress will be sustained before adjusting the pace of its purchases. We now expect that the FOMC will decide to start moderating the pace of QE purchases at its December meeting (previously, we looked for tapering to be announced at today’s meeting).”

Maury N Harris of UBS Investment Research says: “The budget concerns suggest that the Oct 29-30 meeting may be too soon for the Fed to begin the long-awaited tapering of quantitative easing as negotiations may still be ongoing. Also, we believe the Fed would prefer to avoid a Dec 17-18 tapering as that could be viewed as too risky in the midst of the key holiday shopping season. We now believe that the Fed will not begin tapering until the first quarter of 2014, with the January 28-29 FOMC meeting somewhat more likely than the March 18-19 meeting.”

Robert V DIClement of Citi Research, says: "The FOMC's announcement today that asset purchases will remain at $85 billion for now was not our call. While we still believe that the start of tapering may be resolved by year-end, the bar is higher than we thought and we can't rule out a lengthier debate dragging into next year. The emphasis on maximum accommodation extended to forward guidance on both QE and rates. Updated economic and interest rate projections show the economy at or near full employment in 2016, while expectations for the funds rate remain far below what previous experience would anticipate.”

Ted Wieseman, US economist at Morgan Stanley, says: “At his press conference, Chairman Bernanke indicated that in addition to concerns they had about financial conditions, generally the Fed wanted to see more data confirming its forecast for a sustained pick-up in growth before starting to scale back QE – ‘We're looking again to see confirmation of our broader scenario, which basically is that we'll continue to see progress in the labor market, the growth will be sufficient to support that progress, and that inflation will be moving back towards target. And that's what will determine our policy decisions.’ At this point who knows what that means specifically in terms of near-term incoming data looking ahead to the October 29-30 and December 17-18 FOMC meetings. We don’t have any good sense of what the Fed’s reaction function is at this point, so our initial baseline is flip a coin on QE tapering at upcoming meetings.”