Stock markets across the US and Europe have reached five year highs as investors await the Fed's policy decision due at 7pm this evening.
Fed chairman Ben Bernanke is widely expected to reduce QE by $10 billion a month - less than was initially thought, and as a result stock markets have bounced. It is thought Bernanke will be leniant because of worse than expected employment figures.
Sceptics have credited the stimulus package with helping the S&P 500 reach its all-time high earlier this year, and since Bernanke announced plans to taper QE in May markets across the globe have been volatile.
Cash has flooded emerging markets since QE1 was first initiated in 2008, turning cheap borrowing into high returns invested in risky emerging market equities and bonds. This tide of cash will subside once the Fed cuts back on its stimulus however, and as a result Asian stock markets fell in the months after the May announcement.
Today the S&P 500 however, came just 4 points shy of an all-time high at 1,706 - reacting to the rumours that QE would not be cut quite so dramatically. Yields on T-bonds - or US Treasury bonds - have risen since the plans to reduce stimulus were first announced in May from 1.8% to 2.86%.
Other stock markets up today include the FTSE All World and the European composite index the Stoxx 600.
Russ Koesterich, BlackRock's global chief investment strategist said that today's announcement should offer investors "clarity".
"Given the softness in the economic data and the lack of inflationary pressures outside of oil prices, the Fed will announce only a modest reduction in the rate of their asset purchase program," he predicted.
"Specifically, we expect the Fed will reduce the size of their monthly asset purchases from its current level of $85 billion to somewhere between $70 and $75 billion. Additionally, since this sort of reduction appears to already be priced into the markets, we think that long-term interest rates should be relatively contained over the coming months."
As a result Koesterich expects emerging markets to stabilise, as a more stable interest rate environment should translate into better performance for emerging equities, a trend that we have already started to see in recent weeks.
Luke Newman, co-manager of the Henderson UK Absolute Return Fund does warn that stimulus cannot continue forever.
“The fact that the Fed believes the US economy has picked up enough to begin cutting back on stimulus measures should be seen as an encouraging sign,” he said. “With US Treasury yields increasing, this could spur US dollar buying - with any climb in the dollar improving the competitiveness of exporters in Asia, Europe and the UK. Bernanke has also left room for more flexibility if the US economy does not pick up as expected. Needless to say, stimulus measures cannot continue ad infinitum and a well communicated, orderly and slow withdrawal is far preferable to a sudden and unexpected termination.”
