At its upcoming FOMC meeting on Jan. 28-29, the Fed’s Federal Open Market Committee (FOMC) is expected to continue its policy of “tapering” of quantitative easing (QE). Reuters reports that a reduction from $75 to $65 billion per month in QE purchases “is all but certain, based on policymakers’ recent comments.” However, the Fed will be announcing this after the worst week for global stock markets in seven months, as massive reverse carry trade flows out of emerging markets surged at the end of last week—a direct response to earlier “tapering” —which could swell into a tidal wave in the next few days.
Indicative is the situation with the Turkish lira, which dropped through the level of 2.3 to the dollar on Jan. 24, despite massive central bank intervention on foreign exchange markets the day before, to the tune of $2 billion. The currency has lost over 10% of its value since mid-December.
As the U.S. Fed begins to lightly tap the brakes (or, to be more precise, slightly lift its foot off the accelerator), the pressure is being ratcheted up on Europe to floor their QE accelerator. After U.S. Treasury Secretary Jack Lew’s trip to Europe last week to demand just that, IMF head Christine Lagarde spoke at the Davos World Economic Forum today and said the Eurozone inflation rate is “way below target,” and there is a serious danger of deflation if more money isn’t pumped into the system quickly. European Central Bank (ECB) head Mario Draghi responded by repeating his line that the ECB is ready to act if needed, but he would not be pinned down on adopting QE: “I’m not saying it should be done or it shouldn’t be done,” he said coyly.