Week Ahead: Will Federal Reserve Burst The Bubble On Wednesday?

Washingon (Dec 14)  There have always been skeptics concerning the current highs for stocks who argue the markets are juiced by cheap money — the unusually low interest rates being facilitated by the US Federal Reserve — as well as demand chasing a shrinking supply of shares and massive stock buy backs by public companies.

When the Fed takes away the free money, the skeptics argue, normality will return to markets with a bang, financial assets will be priced accurately, and we should all watch out.

Well, on Wednesday, we might get some clues as to when the skeptics’ day of reckoning will come, when the Federal Reserve issues its latest policy statement at 2pm.

Traders and investors are agog waiting to see if the Fed changes the language in its long held vow to keep interest rates close to zero for a “considerable time” even after its massive bond-buying stimulus measures have ended.

The Fed’s large-scale buying of Treasury and mortgage related bonds – which took its balance sheet over $4 trillion – helped the US economy recover from the financial crisis of 2008-09 and helped keep interest rates near zero for years.

But the bond buying has now ended — if you don’t count the Fed continuing to reinvest payments from maturing bonds in new debt securities — so all eyes are now on what the Fed says about the “considerable time” it will take to lift interest rates back towards normal levels.

Some pundits took “considerable time” to mean six months after the bond buying ended, and many have said they expect the Fed to start raising rates some time in the middle of 2015.

But the deliberately Orwellian language of the Fed is impenetrable to most mortals and has fooled many an investor down the years.