Fed Chair nominee Janet Yellen will have the daunting task of winding down Fed stimulus without causing the equity markets to collapse. In fact, one of the first decisions Yellen will have to make as Bernanke's successor is when and how much to reduce bond purchases. Presumably some time in 2014, the economy will show enough growth (or reduction in unemployment) for the Fed to begin to unwind its massive balance sheet. Unfortunately for Yellen, the markets appear to be addicted to Fed stimulus. It's actually kind of ironic if you think about it - it's very difficult to quantify the benefits of central bank bond buying. It's really more of a confidence booster than anything. As such, Yellen will need to find a way to keep investor confidence high while at the same time weaning the markets off of Fed stimulus.
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Good update Jay - but why the conviction that QE will be tapered in 2014, at least in any meaningful way? They gave themselves the flexibility with QE3 for it to continue permanently for a very good reason.
I don't think bond buying will necessarily go away in 2014, but I do believe it will be reduced. Maybe the reduction won't be substantial - and it will have nothing to do with the money supply or inflation potential. However, I think Yellen will want to wean the market slowly off QE so we won't see huge selling in equities each time there's an announcement that bond purchases will be lessened.