6th/Jan/2014

* The Federal Reserve, soon to be, led by Janet Yellen, who is poised for confirmation by senate today, begins pilling back on its quantitative easing amid strong U.S growth.

- The erosion of the most synchronized stimilus that has supported the world economy for the past six years has investors anticipating a stronger U.S Dollar and weaker Treasuries. However the fear for keeping deflation at bay as well as fear of unsettling markets or upending economic expansion leaves most central banks pledging to keep interest rates at record lows.
- Higher borrowing costs on U.S sovereign debt and the improving economy will help boost the dollar this year. Signs that the world's largest economy is strengthening may be enough to rally equities in the US market and abroad.
- Jobless rate fell to a five year low in November, manufacturing grew in December at the second fastest pace in more than two years and employers are expected to have added 195,00 jobs lat month.
- The challenge for other central banks is that if long-term borrowing costs do rise in the US, this may pull up comparable rates elsewhere, threatening more fragile expansions and forcing a response from policy makers.
- Fed officials have honed their message as they try to underscore that tapering isn't the same as tightening monetary policy. The FOCM made a commoittment last month to keep the benchmark federal rate near zero "well past the time" unemployment falls below 6.5%, especially if projected inflation comtinues to run below their 2% target.

* Bank of England trying to cool its housing market.

- While BoE indicates its benchmark rate will stay at 0.5% this year, it is inching toward a stimilus exit, saying in November it would dilute a credit-boosting program as housing prices, sales and morgage demand all accelerated.
- The risk of a premature withdrawal of support, as inflicted by the Bank of Japan in 2000 and the ECB in 2008 and 2011, leaves central banks likely to use more so-called forward guidance in 2014. The theory goes that if they avoid mixed messages and signal how long they expect interest rates to stay low, investors will respond by restraining market borrowing costs, too, helping households and companies.


* The European Central Bank and Bank of Japan lean toward more monetary action to fight weak inflation.

- The ECB is already on the offensive against weak price pressures, cutting its benchmark rate to 0.25% in November to shore up inflation now less than half its target of just below 2%. GDP in the Euro region fell 0.4% in the 3Q and October unemployment was 12.1%, down from a record 12.2%.
- President Mario Draghi has refused to rule out further cuts and pledged rates will stay low for an "extended period". He has signaled the bank may be willing to charge financial institutions to hold their cash or offer new long-term loans.

* Bank of Japan Inflation targets

-The BoJ, which in April intensified asset purchases and introduced a new inflation target, also may pursue more stimulus as the government raises the sales tax to 8% from 5% this April to curb its debt.
- Bank offocials see significant scope to boost Japanese government asset purchases if needed to achieve their 2% inflation target. The current pace, equivalent to 70% of new government debt issued, isn't a limit for many officials.


* US unemployment was 7% in November, and Fed's preferred measure of inflation was 0.9% the same month.
* In Britain, with unemployment already at 7.4%, the Bank of England may follow by saying it won't consider raising rates before joblessness reaches 6.5% or even lower. Its current threshold is 7%, a level it now expects to be reached by the third quater of 2015.
* Even if 2014 does mark the beginning of the end of widespread global stimulus, support will be drawn down slowly. JPMorgan Chase estimate the average interest rate of advance economies will be almost unchanged, at 0.33% at the end of the year.
* The reason to keep money cheap is that price pressures still are weak and hiring in most of the industrial world, with JPMorgan Chase estimating global inflation was about 2.8% last year, the second-lowest since World War 2. Policy makers also will be wary of rocking markets as the Fed did last summer when it began signalling tapering was pending.