Wall Street eyes Fed's next move as QE ends

Quantitative easing, the policy experiment the Federal Reserve hatched during the financial crisis, is expected to be phased out by the Fed Wednesdaywhen it concludes its two-day meeting.

The bond-buying program, dubbed QE by Wall Street, has been instrumental in helping the U.S. economy rebound from the Great Recession by keeping borrowing rates low for mortgages and other forms of credit.

Wall Street expects the Janet Yellen-led Fed to confirm that it's ending QE3, the first step in normalizing monetary policy, which also includes short-term interest rates still pegged at historic lows of roughly 0%.

But the end of QE, which has been widely telegraphed by the Fed, won't cause major market turbulence, predicts Julian Jessop of Capital Economics. 'The fallout,' he writes, 'may be less than many have long feared.'

He says support from QE won't evaporate just because the Fed is no longer adding to its holdings, since the boost from prior purchases will remain in the system. The end of QE also reflects an improving U.S. economy. 'The prices of U.S. stocks might simply be expected to level out, rather than fall,' he told clients.

The key thing to watch now is when the Fed will start to hike interest rates in 2015. 'The focus has already shifted to the timing of the first hike and the pace of subsequent tightening,' Jessop wrote. The market's response will likely be bullish if the timetable is pushed back, and bearish if the first hike comes sooner.

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