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Ahead of the Fed: Look for Clues About Tapering Bond Purchases, Says Johnson


It has been a long and interesting month, to say the least, since we last allowed ourselves to freak out about the Fed. The release of the meeting minutes in February briefly stoked fears that chairman Ben Bernanke might actually start entertaining the possibility of gently applying the brakes on the board's stimulative bond purchases.

In the past month the economy has showed continued signs of improvement on key fronts, such as hiring and housing; attempts to quell the cold war brewing in global currency markets have fallen short; political failure at home has triggered across-the-board budget cuts; and European leaders have just established a new benchmark for unpredictability in crisis mismanagement. All of this happened amidst a backdrop that has seen stock prices blithely surging to record highs.

Other than that, Mr. Chairman, nothing much has changed.

Of course, Fed meetings are always important events, but Hugh Johnson, founder of Hugh Johnson Advisors, says this time around we just might get the answer to the question that everybody is asking: When is the Fed going to curtail its $85 billion a month bond-buying habit?

"They've teed the issue up," Johnson says in the attached video, "and I think we will get the answer that, yes, over time they're going to taper [bond purchases]."

Part of Johnson's counter-consensus prediction is based on the fact that he, like many other investors, is worried that the Fed is "falling behind the curve." If he's right, and this two-day meeting includes discussions about the QE model beyond simply going full steam ahead, then Johnson thinks there's also a good chance that the markets would likely overreact to the news when it is disclosed.

"If anything, the Fed is slow to move," he says. "So maybe to get a little bit ahead of the curve, they talk about tapering the extent to which they're buying securities in the open market to try to keep interest rates low."

As temporarily troubling as that might be for our QE-addicted markets, Johnson stresses that it would not be the end of stimulus or accommodative interest rates — just merely a tapering and a tiny step in the right direction toward normalization.