Market economists have been expecting the Federal Reserve to announce the tapering of its $US85 billion large-scale asset purchase (LSAP) program at the conclusion of the September 17-18 Federal Open Market Committee (FOMC) meeting.
The LSAP, informally known as quantitative easing (QE), consists of monthly purchases of $US45 billion worth of Treasury securities an $US40 billion worth of mortgage bonds. This effort has been intended to keep interest rates low to stimulate the economy.
All of those economists have said any final decision to begin tapering QE would come after the August jobs report, which we now know was much weaker-than-expected.
So, what are the Wall Street’s top economists saying after seeing the crappy numbers, which were highlighted by the fact that July and June were revised negatively?
Basically, they all acknowledge the weakness, but it wasn’t disastrous enough to derail the direction of the modestly improving jobs market. But they all agree that the taper is coming in September. If anything has changed, the initial size of the taper may have gotten smaller.
From their mouths:
Morgan Stanley’s Vincent Reinhart: “Friday’s employment results create more uncertainty about the prospects for tapering starting at the Sept 18th FOMC meeting, but while it’s a closer call, we still expect that Fed officials are becoming confident enough in a sustained turn higher in the economy going forward and dubious enough about the declining benefits of ongoing QE versus rising costs that they will move forward with an announcement of a start to slowing QE. This inclines us to believe that, if they start tapering, it will be a modest amount and accompanied by language emphasising their flexibility going forward. If they decide to wait for more data confirming a pickup in second half growth at this month’s FOMC meeting, that probably just means the start of QE tapering gets pushed out to the October meeting.”
JP Morgan’s Michael Feroli: “Regarding the Fed, we think today’s number leaves them on track for a $US15 billion taper at the September meeting, with a risk of a smaller, $US10 billion move. One argument we have heard against tapering is the softness evident in the July jobs number, and to a lesser extent in August. It is statistical insanity to think that in any twelve-month period with job growth averaging 184,000 that each month’s outcome should be less than 80,000 away from that average, and even crazier to call 169,000 a disappointment relative to that average. As far as the unemployment rate, we are now within shelling distance of the 7% “vicinity” figure that the Chairman has referenced — analogous to baseball’s vicinity rule — as consistent with the end of asset purchases. It is true that today’s move in the rate appears driven by declining participation, but Committee members may gradually be making their peace with a falling participation rate (cf Williams’ comments earlier this week). Moreover, to the extent the doves have highlighted that the unemployment rate understates the degree of labour market slack, they usually do so with reference to the 6.5% threshold policy, not the 7% vicinity rule. To get even close to that plan, the Fed will need to begin tapering soon.”
Deutsche Bank’s Joe LaVorgna: “In terms of the Fed, we believe that the markets are largely prepared for some degree of tapering at the September FOMC meeting. Consequently, policymakers will be loath to disappoint these expectations. As a result, a minitaper — which would consist of a $US10 billion reduction in Treasury purchases and a $US5 billion reduction in mortgages (to $US35 billion per month in each asset class, respectively) now appears to be the most likely scenario.”
UBS’s Kevin Cummins: “All in, the disappointing headline payroll data, including the downward revisions to June and July, make our call for the FOMC to announce tapering at the September meeting a close call. The next key report for the Fed will be the August retail sales, industrial production and CPI reports. Still, we don’t feel it was weak enough to delay a modest cutback in the Fed’s asset purchase program. We continue to expect a token taper of $US10 billion to be announced on September 18.”
Goldman Sachs’ Jan Hatzius: “One risk to our forecast that growth will accelerate from late 2013 is the tightening of our Goldman Sachs Financial Conditions Index (GSFCI) over the past few months, as investors have started to worry about a more rapid exit from the Federal Reserve’s accommodative policy stance. Partly for this reason, we expect only a “dovish taper” from the September 17-18 FOMC meeting, with a reinforcement of the forward guidance for the funds rate.”
Well Fargo’s John Silvia: “With the employment picture normalizing, it is time for monetary policy to move in that direction as well. The first step in that process is to wind down the Fed’s monthly securities purchase program, which we still believe will be announced, and most likely implemented, in September. The second step will be to outline the timing and pace at which the Fed will increase the federal funds rate, which will also be reemphasized at the September FOMC meeting. The latest forecast summary from the Fed shows the majority of FOMC participants believe the federal funds rate will begin to rise around the middle of 2015 and end that year at around 1.25 per cent. We largely agree with this assessment.
Once the Fed makes its announcement about tapering, we believe the discussion will shift toward normalizing monetary policy. The timeline will vary depending on who succeeds Ben Bernanke as Fed chair but should look roughly as it does now, with the federal funds rate beginning to rise around the middle of 2015.”
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