Jim O'Sullivan, Chief US Economist at High Frequency Economics, has been the most consistently reliable economist over the last ten years, according to MarketWatch. He expects that the Federal Reserve Bank will hold off on tapering its $85 billion monthly stimulus this month but will definitely begin winding it down starting in January.
But, O'Sullivan believes there's an alternative route the Fed could take. "They could go halfway in the sense that they could effectively preannounce the move conditional upon more of the same in terms of the data," says O'Sullivan. "Certainly the labor market numbers – and the growth numbers in general – have been pretty encouraging lately. But, I don't think they quite pull the trigger tomorrow. They probably hold off."
O'Sullivan thinks the economy's numbers will improve in 2014. "I'm forecasting 3.3% [GDP growth] for the next four quarters, which is pretty good," says O'Sullivan. "Compared to recent standards, it's certainly better."
Yet that might bode well for stocks, according to O'Sullivan. "From the equity market's perspective, you don't want it to be too strong," he says. "If the growth is too strong, then it's going to accelerate actual Fed tightening."
By "tightening", O'Sullivan doesn't mean tapering, which would have the Fed continue to add dollars into the financial system by buying bonds, but at a lesser amount than the current $85 billion per month. Rather, he means a hike in rates caused in part by the Fed selling bonds back to the market, thereby lowering bond prices and thus raising bond yields.
"What we're talking about now is tapering, as in winding down the asset purchase program," says O'Sullivan. "Actual tightening, as defined by a hike in rates, is still a ways off. We're talking 2015 before that happens. But, if growth really booms, you could accelerate that. So, I think in many ways, modest growth is better from the equity market's perspective."
To see the rest of O'Sullivan's take on what's in store for the economy – including his forecast of the unemployment rate by the end of 2013 (hint: he thinks it gets better) – watch the video above.
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