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Two Fed Members Suggest that “Tapering” Could Start Before March 2014

Yesterday, two Fed members gave their opinions concerning economic situation and monetary policy.


New York Fed president William Dudley (dove, FOMC voter) believes that the economic fundamentals of the US are looking increasingly good. He notes that although growth in 2013 has been disappointing, it will pick up in 2014 and 2015. Moreover, he underlines that inflation is likely to rebound while more substantial improvement in labor market is coming.


In the same time, Philadelphia Fed president Charles Plosser (hawk, FOMC non-voter) urges the FOMC to start “tapering” at the next meeting and to announce a fixed amount of assets that it intends to purchase as part of QE3.


As a consequence, these two speeches suggest that “tapering” could occur before than expected (March 2014).


Note that all Fed members’ speeches concerning QE and economic activity since the September FOMC meeting are available here.

“Tapering”: Expectations Vary From December 2013 to June 2014

While the focus started to shift to corporate earnings and the consequences of the government shutdown, it also turned to the speculation that the Fed will take more time to reduce its asset purchase program.


In the FT, Robin Harding and Michael Mackenzie suggest that “tapering” in October seems to be excluded because of the lack of data. However, Fed officials could still favor a small taper in December if November data show a real improvement from September.


The US government shutdown sabotaged a crucial month of data and dealt a blow to the world’s largest economy, but the Federal Reserve could still begin reducing its asset purchases as early as December.
Analysts have slashed their growth forecasts for the fourth quarter to 2 per cent or below, with many expecting a hit of about 0.5 percentage points from the prolonged shutdown. But many said the economy would bounce back quickly with federal employees back at work.


In the WSJ, Jon Hilsenrath reports that the Fed is unlikely to taper in October but could act in December or January depending on the data strenght.


The Fed is unlikely to start curtailing its bond buying at its next policy meeting Oct. 29-30. Fed officials have said the decision depends on how the economic data evolve, but the data won’t be very illuminating into November because the partial government shutdown closed the agencies that collect them.
Fed officials could act at one of the following two meetings—Dec. 17-18 or Jan. 28-29. Their decision will turn on the strength of an economy that would still be a bit harder to read and possibly stung by recent uncertainty.


Finally, BlackRock Inc. Chief Executive Laurence Fink said Wednesday in an interview on CNBC that the debt crisis is likely to delay the beginning of the Federal Reserve’s exit from its bond buying program at least until March and possibly as late as June.

The FOMC Minutes Confirm That The Probability of “Tapering” In 2013 Is Less Than 50%

- Christophe Barraud


Last night, I read the FOMC Minutes and I didn’t see any change regarding the Fed Communication which suggests that “tapering” will occur soon (in 2013). This morning, this opinion was not shared by the financial press which underlines that some Fed members would have preferred to taper in September and that the status quo could potentially undermine the Fed’s credibility.


The fact is that contrary to many economists and journalists, I’m able to make the difference between arguments from voters (who backed “no taper” at 9/1 in September) and non-voters (who are far more “hawkish”)


We could isolate some excerpts on asset purchases from the FOMC Minutes:


In their discussion of the path for monetary policy, participants debated the advantages and disadvantages of reducing the pace of the Committee’s asset purchases at this meeting, focusing importantly on whether the conditions presented to the public in June for reducing the pace of asset purchases had yet been met. In general, those who preferred to maintain for now the pace of purchases viewed incoming data as having been on the disappointing side and, despite clear improvements in labor market conditions since the purchase program’s inception in September 2012, were not yet adequately confident of continued progress. Many of these participants had revised down their forecasts for economic activity or pointed to near-term risks and uncertainties. For example, questions were raised about the effects on the housing sector and on the broader economy of the tightening in financial conditions in recent months, as well as about the considerable risks surrounding fiscal policy. Moreover, the announcement of a reduction in asset purchases at this meeting might trigger an additional, unwarranted tightening of financial conditions, perhaps because markets would read such an announcement as signaling the Committee’s willingness, notwithstanding mixed recent data, to take an initial step toward exit from its highly accommodative policy. As a result of such concerns, a number of participants thought that risk-management considerations called for a cautious approach and that, in light of the ambiguous cast of recent readings on the economy, it would be prudent to await further evidence of progress before reducing the pace of asset purchases. Consistent with the framework discussed by the Chairman during the June press conference, asset purchases were contingent on the Committee’s ongoing assessment of the economic outlook and were not on a preset course; this approach implied a need to adapt and to adjust asset purchases in response to changes in economic conditions in order to preserve the Committee’s credibility.


This excerpt is absolutely coherent with last voters’ speeches (excluding Esther George). As an example, I selected some headlines from my archives:


***On September 18 – Fed Chairman Bernanke (dove, FOMC voter) / Economic data does not yet warrant a reduction in asset purchases; To await further evidence of recovery.
- Bernanke commented that the Fed is concerned about economy and wanted to observe the effects of higher interest rates before making adjustments to QE.
- Primary reasons for central fed fund rate forecast being at 2% for 2016 unusually low when other economic indicators are expected to be more normalized, are current headwinds that could still persist including the slow recovery in housing sector, and continued fiscal drag.


***On September 20 – Fed’s Bullard (moderate, FOMC voter) / The economy is not that fragile, but there has been some weaker data.
- Wants to see a recovery in inflation before adjusting stimulus program, inflation is expected to rise over the upcoming quarters.


***On September 23 – Fed’s Dudley (dove, FOMC voter) / Labor market improvements have likely been overstated.
- Fiscal drag and current market interest rates are a drag on growth.
- Fiscal uncertainty is one issue impacting the schedule for exiting QE, along with market interest rates and less good data.


***On September 26 – Fed’s Stein (dove, FOMC voter) / Sept decision against taper was ‘close’.


***On September 27 – Fed’s Evans (dove, FOMC voter) / Need more confidence in GDP to taper.


***On October 2 – Fed’s Rosengren (dove, FOMC voter) / Strongly backed FOMC’s decision not to taper QE at the Sept meeting.
- Fed should only remove accommodation when employment and GDP recover.
- Must be prepared to offer more accommodation if needed.


Other voters (excluding Esther George) have not made any speeches concerning economic activity and QE following the September FOMC meeting. However, everybody knows that Janet Yellen and Jerome Powell are very “dovish” and therefore they strongly supported the decision to let the asset purchase program unchanged in September.


At the opposite, I can’t deny that some members urge to reduce the asset purchase program as soon as possible:


The participants who spoke in favor of moderating the pace of securities purchases at this meeting also cited the incoming data, but viewed those data as broadly consistent with the Committee’s outlook for the labor market at the time of the June FOMC meeting when the contingent expectation that the pace of asset purchases would be reduced later in the year was first presented to the public. Moreover, they highlighted what they saw as meaningful cumulative progress in labor market conditions since the purchase program began. Those participants generally were satisfied that investors had come to understand the data-dependent nature of the Committee’s thinking about asset purchases, and, because they judged that the conditions laid out in June had been met, they believed that the credibility of the Committee would best be served by announcing a downward adjustment in asset purchases at this meeting. With the markets apparently viewing a cut in purchases as the most likely outcome, it was noted that the postponement of such an announcement to later in the year or beyond could have significant implications for the effectiveness of Committee communications. In particular, concerns were expressed that a delay could potentially undermine the credibility or predictability of monetary policy by, for example, increasing uncertainty about the Committee’s reaction function and about its commitment to the forward guidance for the federal funds rate, with the result of an increase in volatility in financial markets. Moreover, maintaining the pace of purchases could be perceived as a sign that the FOMC had turned more pessimistic about the economic outlook. Finally, it was noted that if the Committee did not pare back its purchases in these circumstances, it might be difficult to explain a cut in coming months, absent clearly stronger data on the economy and a swift resolution of federal fiscal uncertainties. Most of the participants leaning toward a downward adjustment in the pace of asset purchases also indicated that they favored a relatively small reduction to signal the Committee’s intention to proceed cautiously.


These findings were only reported by Esther George and other Fed members who are non-voters as we can see below:


***On September 26 – Fed’s Lacker (hawk, FOMC non-voter) / Would be difficult to start taper in Oct without losing face (but its could be done in principle based on data), but don’t see any reason why the taper can’t start in Dec.


***On September 27 – Fed’s George (hawk, FOMC voter) / Decision not to taper bond buying could threaten credibility of future Policy.
- Disappointed by decision not to taper, US economic fundamentals have improved substantially.
- Delaying action could lead market to wrongly judge that Fed has become more pessimistic on economic outlook.
- Fed should lay out clear plan about taper start time.


***On September 30 – Fed’s Plosser (hawk, FOMC non-voter) / FOMC undercut the credibility of its own forward guidance, September’s non-action calls the unemployment thresholds into doubt.


***On October 3 – Fed’s Fisher (hawk, FOMC non-voter) / Fed is contributing to economic uncertainties.


***On October 4 – Fed’s Lacker (hawk, FOMC non-voter) / Would have voted to taper even if he had known the US was headed for a two-week govt shutdown.
– Labor market conditions have improved substantially since the Fed began QE.


***On October 8 – Fed’s Plosser (hawk, FOMC non-voter) / Time has come to expeditously phase out the QE program; economy is expanding at 2.5% this year, next year should grow at 3%.


To sum up, for me, it’s clear that voters are more cautious than non-voters concerning both employment, growth and inflation. In the meantime, the “government shutdown” has a negative impact on Q4 GDP so that growth forecasts set in September should be at risk. Moreover, the slowing of growth means less inflationary pressures in a context where we are far below the 2% target. Finally, the latest employment figures (ADP, employment component of ISM services, Intuit Survey, Challenger Job Cuts and now Initial claims) suggest a weaker trend. As a consequence, “Octaper” is very unlikely.


Now, if we focus on December, I think that the probability of “tapering” is less than 50% for different reasons:
1/ The Employment report for October and November will be affected by the “government shutdown” an could lead to a wrong interpretation.
2/ Q3 and Q4 GDP should be weak so that Fed could revise downward its growth forecast for 2013 and maybe 2014.
3/ Inflation will not bounce back immediatly.
4/ Even if Democrats and Republicans are able to find a temporary compromise on the continuing resolution, another “government shutdown” is possible at the end of the year. Indeed, it will be very difficult for politicians to define the amount of new budget cuts and their affectations (civil – defense) for 2014.

Finally, I would like to note that the only error of the Fed concerning its communication is to let speaking non-voters too often so that it could lead investors to make mistakes.

After “Government Shutdown”, the Fed Will Not “Taper” Until at least December

This morning, the U.S. government began a partial shutdown for the first time in 17 years which will put as many as 800,000 federal employees out of work. Moreover, according to IHS, partial shutdown would cost U.S. at least $300 million/day in lost economic output (0.002% of real GDP) at the start.


More from Bloomberg:


A partial shutdown of the federal government would cost the U.S. at least $300 million a day in lost economic output at the start, according to IHS Inc.
While that is a small fraction of the country’s $15.7 trillion economy, the daily impact of a shutdown is likely to accelerate if it continues as it depresses confidence and spending by businesses and consumers.


The impact on the economy will be minimal if the shutdown is short, however, the risk is that the debate could drag on until October 17th (Treasury deadline).


In this context, the Fed will maintain a very accommodative policy letting its asset purchase program unchanged at least until December meeting (December 17-18). Indeed, it is very unlikely that Fed will start “tapering” at the October meeting (October 29-30) for several reasons:
1/ Inflation remains particularly low and well below Fed’s target:
* PCE Core inflation and PCE inflation were revised downward in Q2 from 0.8% (QoQ Annualized) to 0.6%.
* PCE Deflator YoY WAS 1.2% in August and was revised downward in July from 1.4% to 1.2%.
* Prices for gasoline on the New York Mercantile Exchange have fallen roughly 11% in September.
2/ Growth will remain sluggish:
* Fiscal issues were already weighing on companies’ expectations as the BRT (Business RoundTable) third quarter CEO Economic Outlook Survey fell to its lowest level since Q4 2012.
* The latest figures suggest that Q3 GDP, which will be published on October 30, will be slightly below 2% (QoQ Annualized).


3/ Jobs report and other economic reports will be delayed or cancelled according to Reuters. Without figures which sow a significant improvement concerning labor market, the Fed will not “taper”.

The United States will stop publishing much of its economic data next week if the government shuts down, including the closely watched monthly employment report, officials said on Friday.


4/ Given the recent trend in inflation, growth and the fact that employment report will be delayed or cancelled, Fed members’ speeches (voters) since last FOMC suggest that “Octaper” is unlikely:
* On September 18 – Fed Chairman Bernanke (dove, FOMC voter) / There is no fixed calendar for tapering, it could begin this year, depending on data. – FOMC press conf
- Fed to maintain highly accommodative policy.
* On September 20 – Fed’s Bullard (moderate, FOMC voter) / GDP is tracking below 2%, thought it would be higher at this point – speech in New York + comments
- Removing accommodation when inflation is below target is concerning. Fed must hit inflation targets.
- Want to see a recovery in inflation before adjusting stimulus program, inflation is expected to rise over the upcoming quarters.
* On September 23 – Fed’s Dudley (dove, FOMC voter) / Reiterates that Fed policy will continue to be driven by incoming economic data – speech in New York City
- Fiscal uncertainty is one issue impacting the schedule for exiting QE, along with market interest rates and less good data.
* On September 26 – Fed’s Stein (dove, FOMC voter) / US still requires accommodative policy – speech in Frankfurt
* On September 27 – Fed’s Evans (dove, FOMC voter) / Needed to defend inflation from below as well as above – comments from Oslo
- Tapering could start in Oct, Dec, but could be pushed to Jan.


All Fed members’ speeches concerning QE and economic activity since the last FOMC meeting (September 17-18) are available here.