Fed Notes

September 13th, 2013 at 9:37 am

Will the taper start next week?  That’s certainly the conventional wisdom, and I’d put the probability above 50%.  Still, 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?  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—five years after Lehman!

Summers in Autumn? That’s what some of the wires are saying:

US President Obama is to name Lawrence Summers as the next Chairman of the Federal Reserve, according to sources. Treasury Undersecretary Brainard will likely be named vice chairman, according to the report. The White House is expected to make an announcement as early as late next week.

But I can’t see where they’re getting it from.  The timing makes sense, though.  True, the WH has a bit going on right now, but if I were them I’d want to rip this band-aid off.  Plus, confirmation’s going to take some time.  In fact, I suspect that’s what’s been holding this up…the WH has been leaning toward Summers for a while, but must be busy figuring out if they can get him through the banking committee and then through the Senate.

As I’ve said all along, I don’t believe the difference between these two candidates is nearly as wide as the frenzied discussion has suggested.  From what I can tell—and I don’t think you know how someone will chair the Fed until they’re chairing the Fed—they’re both solid choices.  Me, I’d give the tie to the runner and break a glass ceiling with Vice-chair Yellen, who’s done excellent work nudging the Fed to target the output gap.  But the guy making the choice may not be there.

Analogy Alert!  Bin Appelbaum writes:

Federal Reserve officials, who have made clear that they intend to cut back on the Fed’s monthly asset purchases by the end of the year, must decide next week whether it is time to tap the brakes or better to wait another month or two.

To my mind, tapering off of QE is “letting up on the accelerator;” “tapping the brakes” is raising rates.  But given the “second gear” analogy above, I’m already leaning over my skis into the headwinds, trying to hit escape velocity…OK, I’ll stop now.


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One comment in reply to "Fed Notes"

  1. Tom in MN says:

    The “tap the brakes” is exactly what the Fed does not want people thinking reducing tapering is. It’s backing off on the turbo boost, not trying to slow down, but as you say, easing up on the acceleration. Putting on the brakes is when they finally get to raising rates as inflation starts to increase (at least I hope they wait that long) long after QE is over.