Post-Jackson Hole, Fed Septaper still appears on track
With all the QE-bashing that went on at the Federal Reserve’s Jackson Hole conference this year, it was difficult not to get the sense that, barring a major economic disappointment before its September meeting, the central bank is on track to begin reducing the monthly size of its bond purchase program, or quantitative easing.
If anything, the fact that this expectation has become more or less embedded in financial markets means that the Fed might as well go ahead and test the waters with a small downward adjustment of say, $10 billion, from the current $85 billion monthly pace, while waiting to see how employment conditions develop in the remainder of the year.
Atlanta Fed President Dennis Lockhart, who is not a voter this year but tends to be a bellwether centrist on the Federal Open Market Committee, told Reuters on the sidelines of the meeting that he would be ‘comfortable’ with a September tapering “providing we don’t get any really worrisome signals out of the economy between now and the 18th of September.” (Does this count? Probably not.)
However, Susan Collins, dean of the University of Michigan’s Gerald R. Ford School of Public Policy, thinks September might not be such ideal timing for what is effectively a restrictive policy move, in the face of growth that, while sustained, remains subpar. Her reasoning comes down to the political calendar:
I don’t think September is a done deal. What they’ve said very clearly is that this is going to be data-based. Yes they do need to balance the two risks. I think that this recovery is fragile enough – maybe it looks less fragile when you compare what’s happening in other parts of the world, but it’s still pretty fragile.
And I have to say under some scenarios, September could be the worst time. Because depending on what happens when Congress comes back, that uncertainty and the debt debate could mean rising premiums and we see higher interest rates already. Do we really want to push further ahead of that?
Sober Look makes a similar point here, citing a minority view for large Wall Street firms.