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Expectations for December Taper Announcement Grow Among Professional Investors

Today, Federal Reserve Chairman Ben Bernanke presides over his last Federal Open Market Committee meeting, which concludes this afternoon with a 2 p.m. EST press conference. A growing number of hedge fund traders who operate along the yield curve are expecting Bernanke to announce the beginning of the end of quantitative easing.

The historic asset purchase program known as quantitative easing buys mortgage-backed securities in an attempt to keep interest rates low. Unemployment numbers dropped to 7% in November, and nonfarm payroll employment rose by 203,000, leading KPMG economist Constance Hunter to tweet:

Professional investors who specialize in trading along the yield curve make it their business to anticipate potential Federal Reserve moves and plan investments accordingly. Chatter among these professionals regarding a potential December taper announcement -- or at least an indication that the beginning of the end is in sight -- has swelled from a low murmur to a roar.

In recent days, several fund managers have speculated that the probability of Fed tapering in December has risen to 45%. What is behind the tapering talk? It could be about more than just a positive jobs number.

While a robust jobs market was a prerequisite for a taper, two other behind-the-scenes factors could come into play. Bernanke has been praised but also widely criticized for being the mastermind behind the Fed's unconventional bond-purchasing program. Many economists and professional investors have said that the Fed does not have a workable exit program for QE and that the program is suppressing the free market's role in price discovery. I feel Bernanke could initiate the process of ending QE so as to shape his own legacy as the man who both started the program and played a role in its ending.

The second reason to taper in December is more practical. With equity markets dropping at the mere whiff of tapering, announcing the end of the program during the holiday season -- a traditionally bullish period of time for stocks, with many professional traders less active -- could be the best time to taper, as it could lessen the potential negative market impact.

If the Fed does not begin tapering in December, hedge fund traders expect some definitive indication that the program will soon be announced at the press conference this afternoon.

What will the exit of the Fed from the interest rate market do to interest rates? Many hedge fund traders speculate that the yield of the 10-year note could quickly rise to 4.75% without the Fed's QE support. 

That being said...
No matter what the Fed announces, investors should look beyond the immediate effects of QE and focus on what matters most when making investment decisions: business fundamentals. Opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!

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