MacroScope

The Fed’s taper and the question of the “tag-along” $5 billion

June 12, 2014

By Ann Saphir

Federal Reserve policymakers are expected next week to trim their monthly purchases of bonds by another $10 billion, putting them on track to end the massive program by October or December. So – which will it be, October or December? Some Fed officials are pushing for an answer, and soon.

“I am bothered by the fact that I don’t really know what we are going to do on that,” Narayana Kocherlakota, the dovish chief of the Minneapolis Fed, told reporters last month. “It’s another signal that we are not being as clear about our policy choices as we should be.”

If the Fed continues to taper the program by $10 billion at each meeting, monthly bond purchases will be down to $15 billion by the time of the October policy-setting meeting. Richard Fisher, the hawkish head of the Dallas Fed, told Reuters in late May, “I will vote to end it in October.”

Alternatively, the Fed could simply taper by another $10 billion in October leaving the Fed buying a “tagalong” $5 billion each month until the following meeting, in December. ”If you’re sitting around buying small amount of securities, the market sees it as the program is over,” St. Louis Fed President James Bullard told reporters last week, adding that policymakers may discuss the “official end date” of the program next week. “From a committee communication point of view, we need to send a clear message one way or another.”

Whether the Fed ends bond-buying in October or in December is, on the face of it, a small matter; after all, it will do little to change the overall size of the program, which will total $1.6 trillion when all is said and done. Still, it would be an important milestone as the Fed steers monetary policy back to more familiar waters.

Wall Street pretty much expects it to end the program in October, according to the latest New York Fed survey of primary dealers, so if the Fed makes that decision official, markets shouldn’t react.

“Conducting fed policy is rather like the advice you get when you travel through bear country: communicate as loudly as you can about what you are doing or you might alarm the locals,” said Bruce McCain, chief investment strategist at Cleveland-based Key Private Bank. “If they held up the last taper, that would rattle the markets and probably be counterproductive.”

Kocherlakota, speaking with reporters last month, sounded a similar note of caution. “I worry that market participants will start to hang on this virtually meaningless decision as having great content about future committee decisions about how hawkish or dovish we are going to be,” he said.

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