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Months Of Anticipation Will Come To An End This Week

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The Federal Reserve finally says whether it will start to rein in its massive stimulus of the economy, which has flooded financial markets with some $2.75 trillion over the past five years, supercharging returns on everything from stocks to junk bonds. But for all the concerns that the reduced presence of such a giant asset buyer would be calamitous for investors, it appears equity and bond markets are poised to take this week's Fed decision largely in stride - provided the central bank doesn't surprise with the size of its move or shock in some other way. The Fed has telegraphed its intentions to pare back its monthly purchases of $85 billion in bonds at its two-day meeting that ends on Wednesday. The scale of the tapering and what Fed Chairman Ben Bernanke might say at his press conference are key here, but the steady messaging in the last few months means the coming week probably will not see carnage in the markets.

Investors have already done a lot of work in absorbing the Fed's message. Benchmark bond yields are now hovering near two-year highs, while stocks have edged off highs reached in early August, removing some of the froth that had started to concern some investment strategists.

"The Fed already got tapering without actually tapering," Link

Is all the talk about housing bubble related to the Fed's decision?

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The European Central Bank has room to manoeuvre to help offset any turbulence caused by the U.S. Federal Reserve reining in its monetary stimulus, ECB Executive Board member Peter Praet said. The bond market rout has driven yields higher across the board, including for low-risk German debt, which Praet said was a sign of "normalisation" after the record low rates of recent years.

He said that recent tensions on short-term money markets were partly due to falling liquidity in the banking system as some banks repaid 3-year loans that the ECB granted during the darkest episodes of the euro zone's debt crisis. Banks were paying back the 3-year loans because they were trying to shrink down their balance sheets and reduce lending to the economy, possibly causing a de facto tightening of monetary policy. Link

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