The Federal Reserve will hold it’s next Federal Open Market Committee (FOMC) meeting from December 16-17.
Among other things, they will decide whether or not to begin tapering quantitative easing, the monthly purchases of $US85 billion worth of bonds. This program was launched to stimulate the economy by keeping interest rates low and credit markets liquid.
The incoming economic data has been good.
However, economists aren’t sure the Fed will announce tapering this week. (Although they will acknowledge that the odds of a Dec-taper are up.)
“The best argument for a December taper is the risk that economic data weaken before the January 28-29 FOMC meeting, closing what is now an open window for scaling back QE,” wrote Neal Soss in his FOMC preview. “The best argument against a December taper is the reduced market participation and liquidity around the holidays, which pose an extra hurdle to significant year-end policy changes.”
“Our assumption remains that the next monetary policy move will be toward fewer asset purchases balanced by strengthened forward guidance on retaining low policy interest rates,” he added. “And the likely timing of such a decision now appears to be practically a toss-up between December and January.”
A “toss-up.” That’s not very satisfying.
But Soss’s reasons for and against a Dec-taper are evenly split. From his note (verbatim):
More reasons to taper in December.
- Bernanke said in June, “If the incoming data are broadly consistent with [our] forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year.” A December taper would be consistent with that guidance.
- Tapering would at least get started at the 7% unemployment rate at which QE3 was earlier envisioned to end.
- Concern about frothiness in several financial markets.
- Fed is buying larger percentages of assets as gross MBS production slows and near-term Treasury budget deficits shrink.
- Market participants may be starting to understand that tapering does not imply a change in the Fed’s overall accommodative policy stance.
- There is a post-meeting press conference already scheduled for December 18.
More reasons not to taper in December…
- A taper announcement at the FOMC meeting on December 18 would leave only two business days before a two-week stretch of thin market participation around Christmas and New Year’s Day.
- The labour market is weaker than the headline figures suggest (i.e., the “Yellen indicators,” while improving, are still mixed at best).
- FOMC members may not be convinced that the recent headline labour market improvements will be sustained.
- Inflation is still running well below the Fed’s 2% target, and the outlook is for more of the same through at least 2014.
- Both Bernanke and Yellen have said they currently don’t see risks to financial stability, despite some evidence of a collective reach for yield.
- A press conference can easily be scheduled for January 29, if necessary.
For now, the consensus continues to bet on a taper announcement occurring some time in early 2014.