Economists expect the Federal Reserve to announce that it is be tapering, or gradually reducing, it’s monthly purchases of $US85 billion worth Treasury securities and mortgage-backed bonds.
In other words, it will continue to buy these bonds, but at a slower pace.
However, some people trading the markets are confusing “tapering” with “tightening,” the latter being the Fed’s effort to actively raise interest rates.
As such, Fed-watchers across Wall Street expect the Fed to reiterate very clearly that tapering is not tightening.
From some economists’ research notes:
- Michael Feroli, JP Morgan: “Emphasise tapering is not tightening, etc. Tapering isn’t tightening; Future tapering decisions will be data dependent; Purchases can be decreased or increased. All of these messages have been said in previous press conferences, and we expect the same thing at next week’s press conference. Something may be gained from repetition, but we don’t see it as particularly newsworthy if the Chairman reiterates these points”
- Neal Soss, Credit Suisse: “Fed policymakers must know that the markets view “tapering” as “tightening,” even though they themselves for the most part do not. Thus, they are going to need to sugar-coat the message of tapering somehow. We believe the FOMC will insist that short-term interest rates remain anchored near zero for a long time, even after net asset purchases have ended.”
- Joe LaVorgna, Deutsche Bank: “Furthermore, a slow pace of monetary tightening is how the Fed will reinforce the notion, which will no doubt be repeated by the Chairman in the post-meeting press conference, that a tapering of quantitative easing (QE) is not the same thing as a tightening. Essentially, this obviates the need for the Fed to tweak its forward guidance. Mr. Bernanke will also repeat in his press conference that even after QE is completed, monetary policy will remain highly accommodative. This will further limit a negative reaction in the financial markets to the projected tapering.”
- Kit Juckes, Societe Generale: “I have visited Kansas, Chicago, Boston, New York, Sacramento and San Francisco on this trip. San Francisco wins the crane count. Everywhere, there is doubt, about whether the US economic recovery is strong enough to cope with tightening. Which just highlights the main point — that tapering isn’t tightening. On the other side of the tapering announcement, US monetary policy will still be incredibly easy, asset-friendly, and not very dollar friendly.”
Should tapering accidentally cause rates to surge, the Fed’s got heavy-calibre ammo for that.
“True, Fed officials have used QE in the past to signal the Fed’s willingness to keep policy accommodative for a considerable period,” said Morgan Stanley’s Vincent Reinhart. “But that was then. Now they can signal the intent to keep policy accommodative — the forward guidance so much in vogue among central bankers — by adjusting their threshold on unemployment or introducing a lower bound on inflation. With this heavy-calibre ammunition in reserve in the event yields back up uncomfortably later in the year, they can put QE on the road to retirement. For the incumbents at the Fed, starting now puts a body in motion that will stay in motion for the next leader.”
Currently, the Fed’s “forward guidance” consists of an unemployment rate threshold of 6.5% and an inflation rate threshold of 2.5% to help guide monetary policy. In other words, as long as unemployment stays high and prices remain low, the Fed will continue to do what it can to keep rates low.
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