The Fed is Facing Two Major but Opposing Risks on Premature Tapering and Delayed Tapering

Tapering is urgent but wait, now the Fed is facing two major but opposing risks: first, premature tapering could unleash market turmoil that could threaten a still fragile recovery; of course the unbalanced finance can damaged more deep

And second, delayed tapering could further drive up the cost of the inevitable QE exit. The emerging market collapse in early summer may have been just a harbinger of what could come once central bank liquidity injections end.

Meanwhile, Some observers have argued that the market will react in a more relaxed manner to the next round of taper talk as the issues would be familiar. However, this might be too optimistic a view.

If we see the Equity markets have continued to rally with the S&P reaching new record highs while 'carry' currencies such as the Australian dollar have regained lost ground, even though the advance has since been capped by the October FOMC statement not shutting the window on early tapering.

Given that it has generally been a lacklustre year for most investors, the pressure is to jump back into riskier trades and generate some more performance before year end, even if the tail risk of early tapering might continue to loom. In this situation, any piece of weak data and any dovish communication could push tapering expectations further out and lure investors back into risk, thereby increasing the cost of the inevitable exit.

Source: zerohedge