On Shpilkes Re the Fed

September 18th, 2013 at 11:52 am

We’re all on shpilkes here at OTE waiting for the outcome of the Fed’s Open Market Committee meeting to wind up later, with the statement due out at 2.

The question, of course, hinges on the taper–if and how much they’ll reduce their monthly asset purchases targeted at lowering longer-term interest rates.  A few thoughts for now, but I’ll get back to you once they’ve spoken.

–The expectation is for a dovish tapir taper, as shown below, shaving maybe $10-20 billion off their monthly bond buys.  Remember, this is not taking away the punch bowl.  It’s not even taking away some punch.  It’s using a smaller ladel to add to the punch bowl.

–Speaking of punch, there’s research to support the view that all this QE stuff isn’t having much impact.  My read is that, to the extent that you can separate its impact from other Fed actions (e.g., near-zero rate, forward guidance) it initially put some downward pressure on rates but is less effective now in that regard.  Which raises the interesting case of the:

Asymmetry of Quantitative Easing: Given that QE has, by some estimates, had relatively small impacts on lowering rates when it was turned on (really, when it was left on), it appears to have a considerably larger impact when you begin to turn it off.  This surely relates to the skittish mentality of markets right now, as I mentioned re the strange, global anti-Summers rally.

–On the other hand, forward guidance right now would probably do more to set expectations, and thus I expect one of the following two outcomes:

40%: “we’re holding off on the taper because of all the headwinds–long term rates rising faster than we want–leading to some weakness in housing, we’re not loving the recent jobs reports, GDP is no great shakes, inflation is low and recently decelerated, Congress is whacked…so, we’ll probably start the taper next month…hasta la vista, baby!”

60%: “here’s a dovish taper with some strongly worded forward guidance to offset any over-reaction to said taper…maybe even a lowering in our unemployment threshold given the decline in labor force participation…”



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