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Flash: The Fed's asset purchases: shifting balance of risks - Nomura

FXstreet.com (Barcelona) - Nomura economists believe that at his recent testimony, Bernanke sent a signal out to the market.

They begin by noting that the US economy is in a tug-of-war between the near-term drag from fiscal policy and improving long-term fundamentals. Ultimately they expect the US economy to accelerate in a meaningful way. They feel that the path of the Federal Reserve’s asset purchase program will depend on how the data and the outlook, driven in part by financial conditions, evolve in the months ahead.

They note that last week Chairman Bernanke signaled that the debate on ratcheting down the Federal Reserve’s asset purchases has moved onto the active agenda of the Federal Open Market Committee (FOMC). The Nomura team have not changed their outlook for the economy, but in the wake of the Chairman’s testimony they think the FOMC is likely to take the first step in removing accommodation somewhat sooner than they previously anticipated. They now think the most likely outcome is that the FOMC will announce a reduction in the pace of its asset purchases at end of the third quarter(probability of 50%).

Further, they see a small likelihood that the Committee could formally announce a change sooner than that (probability of 10%). Additionally, there is still a considerable chance that the FOMC will not change policy until after the third quarter (probability of 40%). Nonetheless, they feel that the FOMC seems intent on limiting the economic fallout from any future decision to scale back the pace of its asset purchases. They write, “Recent statements by Chairman Bernanke and other FOMC participants regarding their willingness to increase the pace of asset purchases even after they first decrease them, may be a signal that they are prepared to act to suppress any financial volatility that threatens the recovery.”

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