"Keep your eye on the data," says Payden & Rygel's Mark Stanley as he tackles the question: "To taper or not to taper?"

Two things kept me on the edge of my seat this week and for now at least, the tension that built up in the preceding weeks has been deferred. England qualified for the World Cup in Brazil thanks to victories over Montenegro and Poland, the fall out from any failure would have been dramatic with inevitable calls for heads to roll,but instead we look forward to a more relaxed spell of a few international friendlies before the serious stuff kicks off again next year. The second cliffhanger has been played out in front of a global audience in Washington DC with the world's largest economy teetering on the brink of default - until a deal was finally done this week.

So with default averted in Washington - or at least postponed until late January/early February next year, investors' attention will return to the macroeconomic backdrop and the key question that had been occupying minds since May - "to taper or not to taper?" 'Tapering' refers to a gradual reduction in the unprecedented quantitative easing that the Fed has been engaged in since the financial crisis first took hold; and ever since the Fed first mentioned tapering in early summer, markets have reacted negatively, expecting interest rates to rise.

The message the Fed delivered to the world at its September 18th policy meeting was: "We are data dependent - monetary policy is not on a preset course." Of course, just as it is difficult to navigate a modern aeroplane without an instrument panel, so too is it difficult to be a central bank that is dependent on data without data to depend upon. With the lights back on in Washington as the partial government shutdown ends, what will policymakers look for in the data?

First, Federal Reserve policymakers expect a "pick up" in the pace of economic activity. In fact, in order to reach the Fed's 2013 real gross domestic product (GDP) growth forecast, growth will have to be at or around 3% for the third and fourth quarters. After the debt ceiling stalemate and the 16-day government shutdown we expect policymakers as well at private forecasters to lower their expectations, at least for the fourth quarter. But, more of the same 2% growth will just not be enough. If that is what the data shows, expect tapering to be delayed again.

Secondly, on the inflation front, price pressures both here in the UK and the US remain moderate at best. The Fed's preferred gauge of core inflation, which it catchily calls the personal consumption expenditures (PCE) measure, has registered six consecutive monthly readings of 1.2% year-on-year through August, which are well below the Fed's 2% target. For central bankers this is a worry and a key reason to remain cautious. We think policymakers would like to see readings on this gauge head toward 1.5% and higher over the balance of 2013 before turning to taper.

And, thirdly, the US unemployment situation is far from healthy. Some analysts cheered the decline in the unemployment rate from 8.1% to 7.3%. However, the monthly pace of employment growth has clearly decelerated since the spring. The three-month average of payroll employment fell to 148,000/month from 200,000/month in April. Is this a temporary slowdown? Will payroll growth return to 200,000/month. We think policymakers look for just such a development before moving toward a taper.

In the US, with the fiscal crisis averted, the country can focus on its favourite sporting pastime of baseball where the 'World Series' (the annual league involving teams exclusively from the US) will be in full swing come the autumn. As is the case in many sports, batters in baseball often hear the advice, "keep your eye on the ball", as a reminder to focus and make contact with the fast-approaching baseball. In this spirit, the advice is: keep your eye on the data. In particular, focus on the evolution of the data relative to the forecasts. This alone will answer the question: "To taper or not to taper?" Data disappointment this autumn will delay tapering, and ultimately, the first sign of a rise in interest rates. We think this is a key consideration when thinking about interest rates as we head toward 2014 and beyond. Based on the data we have to depend on so far this year, like the World Cup, tapering may be a topic for 2014 not 2013.

Written by Mark Stanley, senior portfolio director, Payden & Rygel

Mhstanley@payden.com