Most market economists
expect the Federal Reserve to finally announce the taperingof its monthly purchases of $US85 billion worth of Treasury securities and mortgage-backed bonds this Wednesday at 2:00 p.m. ET, the conclusion of its two-day Federal Open Market Committee (FOMC) meeting.
These large-scale asset purchases, also referred to as quantitative easing (QE), have been intended to keep interest rates low to stimulate the economy.
However, not every economist has a September taper announcement is their base-case scenario.
“We see a very close call, with a higher probability of tapering later this year (our base case is December) than at the September meeting,” said Bank of America Merrill Lynch’s Michael Hanson.
“While we expect the Fed to taper at one of the next three FOMC meetings, we see good reasons to be patient: recent data have, on balance, underperformed; the Fed needs to reduce its over-optimistic forecasts; and downside risks have re-emerged.”
Indeed, it could appear contradictory if the Fed announced a taper while downgrading its economic outlook. And we’ll get explicit details of their outlook at the conclusion of the FOMC meeting. From Hanson:
In addition to the statement, an updated Summary of Economic Projections (SEP) will be released at 2 PM ET on Wednesday. We look for 2013 growth forecasts to be revised lower — another factor that makes us sceptical of a quick or large taper. They also may reduce the unemployment rate forecasts for this year or next on the continued drop in participation. We anticipate slightly slower 2016 growth than in 2015 as the output gap narrows, and unemployment and inflation closer to, but not at, their longer-run levels. Participants also will give their projections for the end-2016 fed funds rate target, and markets are likely to pay careful attention to this guidance. Excluding hawkish outliers, we expect a wide spread with an average around 2% to 2.5% — again, a sign of a gradual exit.
Should we get a taper announcement on Wednesday, Hanson believes it will be a taper-lite scenario, which is expected by many.
“[I]f the FOMC were to decide to reduce their purchase pace in September, we would look for a “token taper” of $US10 – 15 bn, in conjunction with dovish language signaling the Fed’s intent to undertake a gradual, data-dependent policy toward ending QE3,” said Hanson. “We also see a decent chance that the Fed could taper more in Treasuries than MBS in this first move, although our base case is a balanced reduction.”
We’ll cover the announcement live at BusinessInsider.com.