When Should the Fed Taper its Asset Purchases Program?
This question became the focus of investors after the Wall Street Journal unveiled on May 11 that Fed have wapped out a strategy for winding down the $85 billion-a-month bond-buying program. The article notes that:
“Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated.”
In my opinion, Fed is likely to start tapering its asset purchases program after the meeting of September 17-18 for different reasons:
1/ The six-month moving average of nonfarm payrolls reached 208 K in April, a level above the target of 200 K set by several Fed members. Moreover, on May 3, intial claims reached its lowest level since January 2008 underlining the recent improvement on the labor market.
2/ Nevertheless, I can’t imagine that Fed will start reducing its asset purchases after June meeting without clarifying its strategy and avoiding an overreaction from the financial markets. Furthermore, inflation pressures will remain low in the medium term as wages’ increase are moderated. This situation will offer room for Fed to take its time.
3/ The July meeting is also unlikely to the extent that we saw in the previous article that politics should probably find an agreement on the debt ceiling at the same time. Therefore, it will be difficult for Fed to anticipate the result of the negociations. Besides, this meeting will not be followed by a press conference.
4/ Therefore, the next meeting scheduled for September 17-18 should be the best moment as I expect the macro environment to be better with the beginning of a recovery in Eurozone and a moderate growth in US. As a consequence, the situation on the labor market will keep on improving as companies’ expectations will be higher. Note that this meeting will be followed by a press conference and will be used by Bernanke to explain its choice.