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It’s hard to shake the feeling that the Federal Reserve is about to begin pulling back on stimulus not just on the back of better economic data, but also because financial markets have already priced it in. The band-aid ripping debate over an eventual tapering of bond purchases that started in May was so painful, Fed officials simply don’t want to go through it again.
If anything, recent data have been at best mixed, at worst worrisome. In particular, August job growth was disappointing and labor force participation declined further.At the same time, inflation remains well below the central bank’s objective.
Argues Dean Croushore, a former regional Fed bank economist and professor at the University of Richmond:
Inflation data suggest that the Fed should not taper quantitative easing, as the inflation rate in the core PCE price index is a paltry 1.2% over the past year, well below the Fed’s 2% target.
from Expert Zone:
(Any opinions expressed here are those of the author and not of Thomson Reuters)
After a rally of 500 points on the Nifty, markets consolidated at slightly higher levels to close at 5850 this week. It's evident that hope keeps the market ticking -- this time it was various measures by the new RBI governor, Raghuram Rajan,that cheered the markets.
But expectations, at times unrealistic, could lead to disappointment. Though Rajan made the right moves, it would be interesting to see how he uses the limited manoeuvrability he currently has. The monetary policy review on September 20 would be closely watched.
Lost in the bizarre Yellen vs. Summers tug-of-war into which the debate over the next Federal Reserve Chairman has devolved, is the notion that President Barack Obama is getting a second shot at revamping the U.S. central bank.
The perk of a two-term president, Obama will get to appoint another three, potentially four officials to the Fed’s influential seven-member board of governors in Washington. This may buy the president some political wiggle room when it comes to his pick for Fed chair, since he might be able to placate Republicans with one or two “concession” appointments. Every Fed governor gets a permanent voting seat on the policy-setting Federal Open Market Committee.
The complexity of non-traditional monetary policy is hard enough to explain to other economists and policymakers. Market participants prefer sound bites, opines Steven Ricchiuto, chief economist at Mizuho Securities USA in a note. As such, the more the Federal Reserve Chairman Ben Bernanke tries to explain the Federal Open Market Committee's position on tapering and policy accommodation the more he confuses the message, Ricchiuto says.
The problem is fundamental to the nature of monetary policy. According to the Chairman, monetary policy accommodation is adjusted through the Fed Funds rate. Quantitative Easing (QE) is a separate policy. Yet he has also said that tapering is simply reducing accommodation, not tightening. These pronouncements work at cross purposes and ignore how the markets read policy. For the markets, QE is an extension of policy into non-traditional tools. Therefore, tapering is tightening. There is no such thing as reducing accommodation for market participants.
Composure restored. Despite gut-clenching stock market swoops and a violent 100 basis point upward spike in 10-year bond yields since the Fed's June 19 meeting and press conference with Chairman Ben Bernanke, financial conditions are still very easy.
That ought reassure officials at the U.S. Federal Reserve that some normalcy has been restored in financial markets after the abrupt reaction to their decision to signal they would scale back bond purchases later this year.
Credit to Barclays economists for coining the term ‘Septaper’
A solid U.S. employment report for June appears to have cemented market expectations that the Fed will begin to reduce the pace of its bond-buying stimulus in September. Average employment growth for the last six months is now officially above 200,000 per month.
Never mind that, even at this rate, it would take another 11 months for the job market to reach its pre-recession levels – and that’s not counting the population growth since then.
Call it the great wagon circling.
Central bankers are talking tough in the face of the wild gyrations in financial markets. But it's becoming increasingly clear they are sweating - and drawing up contingency plans to assuage the panic that's taken hold since Chairman Ben Bernanke last week sketched out the Fed's plan for winding down its QE3 bond-buying program. U.S. policymakers in particular must have predicted investors would react strongly. But now that longer-term borrowing costs have spiked to near a two-year high, they look to be entering full-blown damage control.
Here's Richard Fisher, head of the Dallas Fed, speaking to reporters in London on Monday:
The following is a statement from the St. Louis Fed following the decision by its president, James Bullard, to dissent from the U.S. central bank's decision to signal a looming reduction in its bond-buying stimulus program:
Federal Reserve Bank of St. Louis President James Bullard dissented with the Federal Open Market Committee decision announced on June 19, 2013. In his view, the Committee should have more strongly signaled its willingness to defend its inflation target of 2 percent in light of recent low inflation readings. Inflation in the U.S. has surprised on the downside during 2013. Measured as the percent change from one year earlier, the personal consumption expenditures (PCE) headline inflation rate is running below 1 percent, and the PCE core inflation rate is close to 1 percent. President Bullard believes that to maintain credibility, the Committee must defend its inflation target when inflation is below target as well as when it is above target.
Federal Reserve Chairman Ben Bernanke has a problem: how to wean markets from dependence on central bank stimulus. On Wednesday Bernanke did what some of his most dovish colleagues have urged for months. He laid out a clear path for how and when the Fed will bring its third round of bond-buying to a close.
It doesn’t take a master detective to figure out his solution – 7 percent.
“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it will be appropriate to moderate the monthly pace of purchases later this year, and if the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year,” Bernanke said in a press conference following the Fed’s two-day policy-setting meeting.
For a central bank that likes to tout the importance of clear communication, the Federal Reserve sure knows how to be obtuse when it wants to. Take Bernanke’s testimony before the Joint Economic Committee of Congress last month. His prepared remarks were reliably dovish, emphasizing weakness in the labor market and offering no hint of an imminent end to the current stimulus program, which involves the monthly purchase of $85 billion in assets.
It was during the question and answer session that the real fireworks came. Asked about the prospect for curtailing such bond buys, Bernanke said: