MacroScope

For the Fed, a healthy fear of déjà vu

March 13, 2013

Haven’t we seen this movie before? U.S. jobs growth is finding its stride, the unemployment rate is easing, stocks are soaring, and, just this morning, a surprise jump in the all-important retail sales figure. And all this rosy economic data with the spring fast approaching.

It’s almost enough to make one forget what happened in the summer of 2012. And 2011. Oh, and 2010.

As the frustrated U.S. Federal Reserve knows all too well, the economic recovery that seemed to have found its legs early in each of those years flopped hard around June or July. The flops, in turn, prompted the central bank to ramp back up its accommodative policies – and no doubt prompted some policymakers to kick themselves for laying off the monetary gas pedal too soon. This pattern, after all, is why the Fed’s economic forecasts have proven over-optimistic the last few years. It’s also a big reason why the Fed is in the midst of its third round of quantitative easing, QE3, with interest rates expected to remain near zero for yet a couple more years.

So while it might seem odd, even reckless, that Fed policy is about as easy now as it was in the depths of the financial crisis, this fear of economic déjà vu probably means that QE3 will continue deep into the second half of the year. The central bank wants to get over that dreaded summer hurdle. Even with the resurrected U.S. housing sector, this year’s tighter fiscal policies will probably keep the world’s largest economy on edge for some time to come.

As the ISI’s Roberto Perli said after last week’s better-than-expected employment data, “If recent trends continue for a few more months the FOMC might conclude at some point in the second half of the year that the outlook is encouraging enough to allow for a cautious tapering off of QE.”

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