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Loan quality lessons learned from 2020

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Here’s what speculators on the American economy say about its future

Focus on FOMC taper decision coming this week

There's plenty of chatter about the U.S. economy going into Wednesday's announcement from the Federal Open Market Committee, especially in regards to whether it will continue to taper investments in Treasurys and mortgage-backed securities.

Globally, several benchmarks are preparing for the announcement, from foreign exchange trading desks to Australian industrial investors. Consensus is that not much will change and the Federal Reserve will continue to reduce purchases by $10 billion in total.

Considering the strength of the U.S. economy is dominating chatter at the World Economic Annual Forum Meeting in Davos, Switzerland, the decision to continue to taper should come as no surprise, according to Ian Bremmer, president of risk think tank Eurasia Group. Decisions by the Federal Reserve to taper are taken with the nation's economic outlook front row in the minds of the voting parties.

Bremmer's email on the mood at Davos would no doubt please those who wish to see the taper continue.

"The most immediate takeaway was the enthusiasm for the United States economy," said Bremmer in an email. "Consensus among attendees was easily above 3% growth for the year — in other words, well higher than the market consensus."

"Inequality and the jobless recovery was more a necessary rejoinder than a counterargument," he continued, "with the CEOs and policymakers expressing greater relief that the economy is turning around than ruing structural inequality (as one wag told me, worrying about inequality is a high-class problem)."

Analysts at investment firm Keefe, Bruyette & Woods as well as Goldman Sachs (GS) also sent notes in support of the taper, which both expect will continue.

"While the Committee has taken pains to note that the path of asset purchases is 'not on a preset course,' a substantial change in the outlook would likely be required for the Fed to either pause or accelerate the gradual pace of tapering started at the last meeting," said the Goldman analysts. "We think this relatively high bar has not been met, some weaker recent data notwithstanding."

The KBW analysts say that despite December's disappointing jobs report, several reserve bank presidents have suggested they remain optimistic regarding the economy's strength.

"The release of the 4Q GDP report Thursday could question that thesis but we expect the FOMC will continue to taper its asset purchases," they conclude.

As for any political risk concerning another overhanging issue, the debt ceiling, Bremmer notes a neutral stance on the political structure of the U.S., meaning politicians don't represent a material risk to the nation's economic recovery.

"There's acceptance that Congress isn't doing much, and isn't getting in the way," he said, about the chatter at this year's Davos forum. "And polarization in Congress, also a hot topic last year, didn't make much of a dent."

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