BofA Merrill Lynch economist Michael Hanson was the only one on the Street to go against the consensus and predict that the Federal Open Market Committee
would refrain from announcing a taperingof the Federal Reserve’s quantitative easing program at its September policy meeting.
“The minutes characterised the non-tapering decision at the September meeting as a ‘relatively close call’ for many FOMC voters,” writes Hanson in a preview of tomorrow’s FOMC decision. “We doubt the vote will be nearly as close for most members this time around. We expect a slightly more dovish statement in light of the shutdown, but no substantive changes to policy or communications at this meeting.”
Hanson expands on his preview in a note to clients:
Same as it ever was
We do not expect any substantive policy changes at this meeting. A few pieces in the financial press have speculated that the FOMC could increase the pace of purchases at this meeting, but that seems extremely unlikely to us absent a significant risk of recession or outright deflation. Others have suggested possible revisions to the Fed’s forward guidance. Support for such changes was not widespread in the September minutes. Moreover, with the markets pushing out the expected date of the first Fed rate hike, there is no urgency to change guidance now. Adding an “inflation floor” also appears unlikely to us at this meeting, although it may be discussed again.
Time isn’t after us
Our base case is for a $US10 bn taper in January, but we have a rather flat distribution over possible taper start dates in 1H 2014. With any decision likely postponed for a time, discussion on the FOMC should turn to more conceptual issues. In the minutes we will look for debates over: how much of the high unemployment and low participation rates are cyclical versus structural, how long inflation might remain below-target, and the costs and benefits of continuing QE for several more quarters. As the “framework” for tapering that Chairman Bernanke laid out in the June press conference no longer appears valid, we expect an in-depth discussion of the economic factors that might warrant tapering, and how the Committee could improve communications around both asset purchases and the exit strategy. But we don’t anticipate any resolution to these issues at the October meeting.
Virtually no one expects the Fed to announce a taper tomorrow, so Hanson is no longer out-of-consensus.