We’ve received emails from a few different Wall Street bond trading desks this morning about a new report from Medley Global Advisors arguing that at its September FOMC meeting, the Federal Reserve made it much more difficult to justify tapering its quantitative easing program going forward.
In the report — titled “Fed: Ctrl-Alt-Delete” — Medley analysts Regina Schleiger and Jeremy Torobin write that, “more than simply standing pat, the Federal Open Market Committee has effectively hit the reset button and is back where it was six months ago — at the very start of a long process of building the case for a downward adjustment to the Large-Scale Asset Purchase program.”
Schleiger and Torobin continue:
Moreover, that eventuality is now a riskier proposition (and, consequently, the process of getting back to within striking distance is more difficult) because of troubling signs that economic momentum is slowing.
The potential costs to financial stability of continuing purchases at the current $US85-billion per month may, down the road, start flashing red and embolden FOMC hawks to push for an aggressive conclusion of the program. But right now the potential costs of withdrawing even the slightest bit of support from the economy appear much greater than they were.
In other words, for proponents of asset purchases, the cost-versus-efficacy calculation that figures into their votes each meeting is now chiefly about assessing the impact of slowing purchases, rather than of continuing them.
This week’s non-farm payrolls report from September merely underscored a weakening trend that was already underway when FOMC members met last month and decided against tapering.
That sluggishness surely carried over (and probably accelerated) into October thanks to the 16-day government shutdown, and it validates the committee’s skittishness about whether the economy could withstand another spike in mortgage rates. Indeed, the National Association of Realtors’ latest reading of US existing-home sales, reported on Monday, brought more evidence of a cooler housing sector.
The FOMC holds its next policy meeting next week. Almost everyone says there is virtually zero chances of the Fed announcing the beginning of tapering at that meeting.
Schleiger and Torobin obviously agree.
“The FOMC’s October 29-30 gathering in Washington will almost certainly produce a status-quo decision,” say the Medley analysts. “Three weeks later, the published minutes from that meeting may reveal little more than a policy committee essentially paralysed pending sufficient data that is not contaminated or muddied by the shutdown to gauge whether September and October will be remembered as another brief ‘soft patch’ or something worse.”
In short, the Fed may have missed its chance.
“The witch’s brew of a labour market that was weaker even before the shutdown and debt-ceiling drama, growth that has disappointed and which was supposed to be accelerating already, and price gains so persistently meager that disinflation could soon take on a central role in the FOMC conversation, mean the bar for any change is higher than it has been for some time,” concludes the report.
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