Its probably one of the most talked events of the year and one which will have a significant influence on equity markets around the globe heading into 2014. We see analysts and commentators around the globe trying to guess and predict what the FED might do, will they or won’t they taper and if they do by how much etc etc etc. To be honest it is impossible to second guess the FED its better to get your head around the fundamentals and sit back and watch. For a lot of top fund managers and investors 2013 has brought with it some impressive equity gains largely off the back of the aggressive easing policies implemented by the three big central banks (BOJ, ECB, FED). Today might mark the start of some profit taking and some top performing fund managers might see today as an opportunity to lock in some impressive gains and retire for the Christmas holidays.

Below I have picked three of the likely outcomes and the possible market reaction, but as mentioned previously it is anybodies guess how the market might react but it is always good to have a plan and a template to work off going into the FOMC meeting;

NO TAPER & NO GUIDANCE

If we get the No Taper decision, we should expect to see bullish (Positive) move in equity markets. Markets may decide that Bernanke is happy to pass the book onto his successor Janet Yellen. As we all know Yellen is in fact one of the most Dovish members of the FOMC, and she would be happy to keep printing until the cows came home if she could. I think if the decision is made not to Taper, there will have to be some guidance provided as to why it hasn’t taken place, and when the FED might to begin to reduce its monetary policy.

NO TAPER & GUIDANCE FOR EARLY 2014

The Fed could also refrain from tapering but strongly signal plans to reduce purchases in early 2014, which would mean either January or March. This is actually one of the highest probability scenarios supported by many economists who think Bernanke won’t risk halting the Santa Claus rally. While the US economy has shown signs of improvement I don’t think it is stable enough to begin taking the foot off the pedal, and I think Bernanke and Co our of the same opinion. While we have experienced improvements in unemployment figures, inflation figures remain weak so no inflation pressure exists under the current policy.

TAPER $5-10bn

For the Federal Reserve, the greatest motivation for December tapering is the strength of U.S. data. Since the last FOMC meeting, we have seen a significant recovery in consumer spending and the labor market. Non-farm payrolls have averaged 204k over the past 4 months and this strength drove the unemployment rate down to 7%. Tapering by a small amount and saying that further reductions would be data dependent could be one of the most palatable options for the Fed. It would allow Bernanke to begin the process of unwinding stimulus but leave Yellen with the flexibility to adjust the program as she sees fit.