Sep 16, 2013 at 8:57 am
Though not of the change of guard part that’s understandably the rage this AM.
This is about the pressing matter of their FOMC meeting this Tues/Wed, wherein they’ll decide whether to start tapering off the amount of their monthly asset purchases, current $85 billion/month. The thinking on the street is that the Fed will decide to taper off mildly (the “dovish taper”) but offset any negative monetary impulse that might have on growth with strong “forward guidance,” i.e., emphasizing that they’ll hold interest rates down until they’re convinced growth is really strengthening.
For a while now, I’ve been suggesting they hold off on the taper.
…there are more headwinds pushing against that idea than tailwinds at its back: long rates already up a point over the past few months, labor market stuck in second gear, GDP barely at trend (1.6% year/year), inflation (core PCE) at 1.2% (!!) and DEcelerating—then there’s Syria, gov’t shutdown, debt ceiling.
Why not wait a month to start? That wouldn’t make any substantive difference in real economy, especially since they’re likely to start slow with a dovish taper ($10 bn (?) off of the $85 bn monthly bond buys) but would send strong signal that the Fed remains highly concerned about the still too weak economy…
Paul K joins the debate on my side this AM, adding an interesting dimension to it. While some research shows that the Fed’s asset purchase program has been only mildly effective in holding down longer-term rates, what matters most right now is the exaggerated market response to even mentioning the taper:
…financial markets have clearly decided that the taper signals a general turn away from boosting the economy: expectations of future short-term rates have risen sharply since taper talk began, and so have crucial long-term rates, notably mortgage rates. In effect, by talking about tapering, the Fed has already tightened monetary policy quite a lot.
In that regard, were the Fed to announce on Wednesday that they’ve decided to keep the current QE program in place until their next meeting, I suspect we’d get a strong market reaction going the other way, shaving some basis points off of longer term rates. And that’s what the still fragile recovery needs right now.
[BTW, speaking of exaggerated market responses, there appears to be a global Summers-bow-out-bounce underway. I just think that’s says a ton more about manic depressive market volatility than Larry Summers' monetary views.]
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