With Fed talk upon us, many start to look for guidance in the news about what all this will mean for the markets, economy, and rest of the world. While much of it depends on actions in the future we can take the present facts and create a theory into the medium and longer term.
Currently the Fed is seen a completing some degree of tapering this meeting (10 to 15bln) and should be looking to stop all stimulus by the middle of 2014. This is the consensus of many so the movements in the markets will no doubt come from a deviation from these estimates or the tone of the language at the press conference.
In the medium term if the news is truly aggressive and the economy keeps pace with the Feds expectations for the full tapering in 2014, many other countries that are not welcoming higher rates (the ECB ad BOE) will have to find a way to differentiate themselves from the interest rates of the US, which will no doubt continue to rise.
Longer term if the Emerging Markets do not pull their economies out of their addiction to FDI much of this excess money (remember that tapering is slowing the increase in money supply not removing any) will come back into the US for investment which will import inflation as many of the central banks will need to sell dollars to stabilize their currencies. This could bring about more inflation in the US which will support the increase in rates as well as gold.
This creates a need for a true decoupling to occur, not in growth but in interest rates. A strengthening US economy and rising yields should not be inherited by other countries that are not ready for it.