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Growth outlook likely to end Fed stimulus

Although the economic growth outlook in the US is not outstanding, it seems that it may now be ‘good enough’ for the Federal Reserve to begin tapering off its bond buying program by the end of this year.

According to The Australian, the outlook has been upgraded from lousy to decent and fears of the occurrence of another downturn are considered minimal – although economists have only given a 13% chance that GDP growth of 3.5% will be achieved this year.

For the last three quarters, the country has achieved a seasonally adjusted annual rate of below 2%, which is quite poor in reality but it is certainly an improvement that the Federal Reserve has been waiting for. Improvements have also been seen in consumer spending, job gains and, in particular, the housing market, which has improved since the bust that led to the global financial crisis.

When the Fed does reduce its quantitative easing, the flow on affect is very likely to affect many companies on the ASX as volatility and investor uncertainty heightens. Westpac (ASX: WBC) and its rival banks, as well as other defensives such as Telstra (ASX: TLS) could suffer short-term selloffs, which would open up opportunities to buy stocks at cheaper prices.

It is strongly expected that the level of bond purchases will be reduced in September, whilst economists estimate just a 5% chance that the Federal Reserve will hold off until next year to reduce the stimulus.

Foolish takeaway

Global markets have been driven by central bank policies and low interest rates for an extended period of time. Whilst share markets have been susceptible to falls at the very mention of the US quantitative easing ending, it should also be noted that the end of the bond buying program would be reflective of a strengthening economy and thus, a good sign for the long-term!

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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