MacroScope

A market-dependent Fed?

September 18, 2013

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.

Or as market analyst Jim Bianco put it on CNBC this morning:

If it was all data dependency, there would be no reason to talk about tapering.

Still, Mike Feroli, chief economist at JP Morgan and also a former Fed staffer, says the Fed is looking at where it expects the economy to be, not where it is now.

The case for tapering seems, to us, pretty straightforward. The 7% terminal condition for asset purchases unveiled after the June meeting is quite likely to be hit within several months, and therefore the Fed needs to get the tapering process started sooner rather than later.

Let’s just hope their optimism is not misplaced – again.

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