Federal Reserve System: How Will FOMC Tapering QE & Emerging Market Turmoil Impact The US Dollar In 2014?

Chicago (Jan 29)  U.S. stocks tumbled on Wednesday, with the Dow dropping as much as 174 points in early trading, as investors continued to weigh fears in emerging markets and await a decision from the Federal Reserve on whether the central bank will taper its stimulus program once again.

The Dow Jones industrial average fell 133.71 points or 0.84 percent, to 15,794.85. The S&P 500 lost 11.90 points or 0.66 percent, to 1,780.57. The Nasdaq Composite dropped 27.36 points or 0.67 percent, to 4,070.35.

The Federal Reserve’s two-day policy meeting concludes on Wednesday,  with the Federal Open Market Committee (FOMC) scheduled to release a statement at 2 p.m. Eastern. The meeting will mark the last for outgoing Fed Chairman Ben Bernanke, as current Vice Chair Janet Yellen prepares to take over on Friday.

“The Fed’s going to do what the Fed thinks they need to do. Everyone was expecting them to taper previously and they didn’t. They’re going to do it on their own time table,” said John Curran, Senior Vice President at USForex. “The market always looks at these things to sort of be a straight line effect. That’s not what the Fed is going to do, I don’t believe. Whether he’s [Bernanke] going to do another $10 billion now, I really don’t know. I didn’t expect them to do it last time, but it wouldn’t be a great surprise if they did. I think what would be more surprising would be if they didn’t.”

The FOMC announced plans in December to taper its $85 billion-a-month bond-buying program by $10 billion in January, surprising some investors. Market professionals now await the Fed’s announcement Wednesday afternoon to prepare for another possible cut to the central bank’s quantitative easing program.

“There’s two schools of thought, one being ‘They’re not tapering, lets sell U.S. and wait for more numbers,’ while the second is ‘They didn’t taper now, they’re going to taper next time so let’s just keep on buying U.S. dollars.’ It’s not a simple buy or sell U.S. dollar scenario,” said Curran. “The caveat to this is we’ve now got the EM outflows affecting US. dollar strength as well. So that’s a bit of a wildcard in this. If I were a betting man, I would think that if they didn’t taper that you would see some dollar weakness.”

Although U.S. stock futures rallied early Wednesday on news the Turkish central bank raised its overnight lending rate to 12 percent from 7.75 percent, the lira fell despite the rate hike, sending Wall Street tumbling in morning trading on emerging market concerns and weaker-than-expected corporate earnings from Yahoo! Inc. (NASDAQ: YHOO), AT&T Inc. (NYSE: T) and The Boeing Co. (NYSE:BA).  The Turkish central bank also raised the overnight borrowing rate to 8 percent from 3.5 percent.

“So emerging markets and other growth currencies are taking the brunt of this hit as the effects of tapering are being realized. So people are pulling their money out of those,” said Curran.