What will the Federal Reserve do?

After on Tuesday and Wednesday's regular policy meeting, the Fed is widely expected to announce that it will start to "taper" its $85bn-a-month quantitative easing (QE) programme, perhaps cutting its monthly purchases of assets such as government bonds by $10bn or $15bn.

Is that good news?

It should be: it means the governors of the Fed, led by the chairman, Bernanke, believe the US economy is strong enough to stand on its own, without support from a constant flow of cheap, electronically created money – though they still have no plans to raise base interest rates from the record low of 0.25%, and they expect to stop adding to QE over a period of up to a year. "We really want to see a situation where central banks should not be pumping money into markets. It's not a healthy thing to be doing," says Chris Williamson, chief economist at data provider Markit.

Why are they doing it now?

Economic data is pointing to a modest but steady recovery. House prices have turned, rising by 12% in the year to June. Unemployment has fallen to 7.3%, its lowest level since the end of 2008, albeit partly because many women and retirees have left the workforce.

Since QE on such a huge scale carries its own risks – it can distort financial markets, for example – the Fed is keen to withdraw it once it thinks an upturn is well underway. However, some recent data, including worse-than-expected retail sales figures on Friday, have raised doubts about the health of the upturn.

There's another reason too: Bernanke's term as governor ends in January next year, and he may feel that at least making a start on the process of tapering – marking the beginning of the end of the policy emergency that started more than five years ago – would be a fitting end to his tenure.

How will the markets react?

With a shrug, the Fed hopes, since it has carefully communicated its intentions. Scotiabank's Alan Clarke said: "I think it's pretty much priced in ... Speculation began months ago, the market has already moved and we are still seeing some very robust data. The foot is on the accelerator pedal just a bit more lightly."

However, a larger-than-expected move could still cause ripples – and a decision not to taper at all would be a shock, though some analysts believe it remains a possibility. Paul Ashworth, US economist at Capital Economics, said: "I don't think they've actually decided on this ahead of time."

What will investors be looking for?

First, the scale of the reduction in asset purchases. No taper at all might suggest Bernanke and his colleagues have lingering concerns about the health of the economy; a reduction of $20bn a month or more would come as a shock. The tone of the statement, and the chairman's subsequent press conference, will also be scrutinised, with markets hoping for reassurance that even once tapering is underway, there is no immediate plan to raise interest rates: Bernanke has previously said he doesn't expect this to take place until unemployment has fallen to 6.5% or below. Williamson said: "I think they will accompany the announcement with a very dovish statement designed not to scare people that the economy is too weak but to reassure stimulus won't be taken away too quickly."

What does it mean for the UK?

Long-term interest rates in UK markets have risen sharply since the early summer, at least in part because of the Fed's announcement on tapering, and that shift, which has a knock-on effect on some mortgage and other loan rates, is likely to continue as the stimulus is progressively withdrawn.

If tapering occurs without setting off a market crash or choking off recovery, it may help to reassure policymakers in the UK that they can tighten policy once the recovery gets firmly under way, without sparking a renewed crisis. David Kern, economic adviser to the British Chamber of Commerce, said: "it will strengthen for me the argument against doing more QE in the UK."

How will the eurozone be affected?

It could cut both ways: a strengthening US economy is a welcome market for Europe's exporters, and if the value of the dollar increases against the euro on the prospect of higher interest rates, that will make eurozone goods cheaper.

However, the prospect of an end to QE in the US has also caused bond yields in all major markets to rise, pushing up borrowing costs – including for many governments. That could make life harder for countries such as Spain and Italy that are already in a fiscal tight spot.

What about emerging markets?

Back in May, Bernanke merely had to moot the idea of ending QE to send emerging markets reeling. A side-effect of the unprecedented flood of cheap money under QE has been that banks and other investors have used the cash to make riskier investments in emerging markets. The prospect of that tap being turned off has already seen capital pouring out of emerging markets and currencies, potentially exposing underlying weaknesses in economies that have been flourishing on a ready supply of cheap credit.

"It has triggered all sorts of significant movements around the world out of emerging markets. It's had big ramifications for India and other parts of Asia," said Clarke.

Central banks in Brazil and India have been forced to take action to shore up their currencies; Turkey and Indonesia also look vulnerable. Many of these markets have looked calmer in recent weeks, but the concrete fact of tapering could set off a fresh panic.

It means that "Germany" and UE needs more money - to be transferred via the Marshall plan - still alive..

The Federal Reserve announced no change to its program of monthly asset purchases designed to stimulate the economy. The central bank will continue to buy mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. "The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," the central bank said in a statement.

• The news sent markets through the ceiling. The Dow Jones Industrial Average, which had been concerned that the central bank would take the economy off life support, hit an all-time high on the announcement. 

• However the decision to maintain the stimulus pointed to a diagnosis on the part of the Fed of sustained, underlying economic weakness. In June, Fed chairman Ben Bernanke said the central bank may begin tapering its asset purchases. There was no sign of such talk today, three months later.

• Bernanke said that unemployment was lower but not low enough (the Fed has set a 6.5% benchmark) and growth is up but not far enough. Bernanke said the current unemployment rate of 7.3% "understates the amount of true unemployment in the economy" because of cyclical and demographic trends.

• The news floored analysts and reporters, who reminded Fed chair Ben Bernanke that as recently as June he was talking about "tapering" quantitative easing. "I don't recall stating that we would do any particular thing in this meeting," he replied.

• Bernanke said the economy continued to show signs of recovery, and sectors closest to the QE program – housing and autos – showed some of the best improvement. "There has been a lot of progress," he said. "Labor market indicators are much better today than they were when we began... more than a year ago."

• Bernanke warned of the potential "very serious consequences for financial markets and the economy" if the country defaults on debt or if the federal government has to shut down due to a congressional failure to reach a budget deal.

Out of a moment of extreme crisis has come an opportunity-now it's up to all sides to seize "IT" with both hands.

We can write a new chapter in the diplomatic handbook, dedicate it to the off-the-cuff remark – the gaffe even – which averts a war.

"We don't yet know if John Kerry's apparently unplanned comment in London, suggesting Syria could avoid a US military strike by turning over its stash of chemical weapons, has set in train a process that will ultimately prevent armed American action. But Barack Obama described it as a "possible breakthrough" and the relief can be felt across multiple world capitals.

Of course the practical problems are legion – one report claims that getting rid of Syria's chemical weapons stockpile could take not weeks or months but "years". Nevertheless, this latest initiative deserves to be taken seriously because it gives all the key players something they need. Crucially, it would allow the antagonists to step back from the brink without losing face.

For Bashar al-Assad, the prize is obvious. If he agrees to ban the banned weapons, to use the vocabulary of the Northern Ireland decommissioning process, he can dodge the US bullet that was perhaps coming his way. Even with Kerry promising on Monday that any attack would be "unbelievably small", Assad would still prefer to avoid an American attack if he can.

For Russia, whose foreign minister, Sergei Lavrov, seized on Kerry's rhetorical flourish and turned it into an initiative, there is a double benefit. First, Vladimir Putin gets to pose as the global statesman who stayed the hand of the mighty American hyper power. Second, Russia has its own reasons for wanting to see Syria's toxic arsenal put beyond use. Moscow has long worried about such weaponry falling into opposition jihadist hands should Assad fall. Spiriting it out of Syria dampens that danger. (Tehran is said to support the latest Russian plan for similar reasons.)"(source: guardian.uk)



Let's be honest about this. This is good for a public that does not want to be embroiled in war, but this is a victory for Assad, and unlikely to end the war. The revulsion produced by his use of chemical weapons (and before someone's knee-jerk response about definite proof, it doesn't really matter for the point I'm trying to make) shows Assad what a poor part of his arsenal chemical weapons really are. He can't use them without risking a western response. So he's giving up something e can't use, for what is in effect a free hand in dealing with his opponents. 100,000 have died before chemical weapons were used, and no one is going to lift a finger as long as he uses conventional weapons. The west has nothing on him, no cards to play, why would he make the slightest concession...
This gaffe will not stop war, because we are already at war with Syria (thanks to the terrorists we have sent in), and because the US wants hegemony over the Middle East to offset the decline of its empire....The suggestion that Assad did this is laughable.
If CW were launched, then there would be satellite imagery from just before the attack, showing a missile launched from within regime held areas. The numerous US geo-stationary satellites that are currently hovering over Syria are designed to spot these things. They've been doing it for decades.
This evidence doesn't exist because it never happened. We know the terrorists are in possession of CW, we know that they have already used them, and we know they had the most to gain from the use of CW...So who do we think used them?
Apparently it's whoever the Botox bandit (Kerry) plucks out of a hat FFS!!!

Ending the summit, Mr Putin said that world opinion was firmly against US-led intervention, and warned that Russia would take the Syrian side in the event of conflict.

“Will we help Syria? We will,” he said. “We are already helping, we send arms.”

He added: “We cooperate in the economics sphere, we hope to expand our cooperation in the humanitarian sphere, which includes sending humanitarian aid to support those people - the civilians - who have found themselves in a very dire situation in this country.”

Russia has been a long-time supplier of weapons to Syria, including a state-of-the-art air-defense system that would threaten even US warplanes attempting to attack. The Russian president said his country would stand with the Assad regime in Syria if the US launches airstrikes.

The apparent threat came as the G20 summit ended with a public split, 11 of its members issuing a statement hinting at the need for US action against the Assad regime of its alleged use of chemical weapons. Russia already supplies military aid to Syria, but the hint of more Russian backing in the event of a confrontation with the US sent jitters through financial markets worldwide.

Mr Putin also mocked Western leaders like US President Barack Obama considering intervening in Syria, suggesting that the majority of their electorates opposed any military action - including Prime Minister David Cameron for failing to persuade the Commons to back British involvement.

Mr Obama, meanwhile, compared the Syrian crisis to World War II, likening his country’s debate over intervention to the eventual American decision to support Britain against Nazi Germany.