Originally Publised in THE FINANCIAL TIMES
September 22, 2013
The Fed is wrong to put off the return to normality
Investors and economists are racing to assess whether the withdrawal of US
stimulus will start later this year or will become a story for 2014, after
the shock decision by the Federal Open Market Committee not to taper its
asset purchases.
While a December tapering announcement remains possible and will likely
become the new consensus, our base now shifts to the first quarter of
2014, said David Doyle, strategist at Macquarie Capital Markets.
We believe by that point there should be more visible and concrete
improvement in growth, inflation and labour market data. The FOMCs delay
has reminded investors that the tone of forthcoming data is crucial to
determining whether a taper will occur.
Despite market expectations that recent softness in US data would not
deter the Fed from tapering before year-end, we find out that the tapering
decision is indeed data dependent, said Marc Chandler, global head of
currency strategy at Brown Brothers Harriman.
With one month of data unlikely to impress the Fed enough to start
tapering in October, that leaves only the December meeting for the Fed to
announce tapering before year-end.
Meanwhile, Michael Feroli, an economist at JPMorgan, noted that Ben
Bernanke, the Fed chairman, said in his press conference that he wanted
more clarity on three issues before proceeding with tapering. One was the
need for more data namely labour market improvement. The others were a
better assessment of the impact of higher interest rates on the real
economy, and the outcome of Washingtons fiscal debates.
Realistically, by the time of the October meeting the Fed will only have,
at best, more visibility on the last of these three issues, Mr Feroli
said. Thus we see December as the more likely time of the first taper.
But Mr Feroli also added rather ominously: There is no guarantee that
housing and the labour market will look better by December. In which case,
to get out of the QE infinity box, the Fed may have to resurrect issues
relating to the costs and efficacy of asset purchases.
Michel Hartnett, chief investment strategist at Bank of America Merrill
Lynch said the decision to taper would remain on hold until mortgage
applications rose.
The summer reversal in housing activity was a likely signal to the Fed
that the macro is still too fragile to withstand even a small tapering. We
believe tightening is unlikely to happen until higher bond yields, bank
stocks, housing activity and corporate animal spirits all signal in
unison that policy has traction.
US Treasury bond yields rose on Thursday following upbeat US home
sales data that
may have prompted traders to expect a taper by December. This is the kind
of data that fits very well with thoughts that the decision not to taper
was only a delay of the inevitable, and any continuation of numbers of this
sort is consistent with a taper by the end of the year, said Alan Ruskin,
a strategist at Deutsche Bank.
Dario Perkins of Lombard Street Research said an October move was unlikely
without risking Fed credibility and the US central bank might produce only
a token taper in December.
With the economy set to remain sluggish during the autumn, before
strengthening markedly next year, a serious adjustment in QE seems unlikely
before 2014, he said.
The writer, a former chairman of the Council of Economic Advisers, is
professor of economics at Harvard University
Received on Mon Sep 23 2013 - 20:57:26 EDT
