A December taper: a chance to regain lost face?

December 18, 2013

Dear Fed,

You should taper in December and regain lost  face.


A growing but vocal minority of economists


Even if the latest Reuters poll consensus still shows the Federal Reserve will wait until March before trimming its monthly bond purchases, the clamor to do that in December – or rather later today – is rising.

Thirteen of 69 economists in the latest Reuters poll, almost one-in-five, now expect the Fed to start rolling back on their bond purchases in December: a sharp increase from the three of 62 in the previous poll.

Those economists forecasting the Fed to act on Wednesday said it would be a chance for the U.S. Federal Reserve to redeem its credibility after wrong footing market predictions in September.


Christopher Low, chief economist at FTN Financial
“The Fed lost credibility when, in May and again in June, Bernanke prepared the markets for tapering in a few months only to pass on a taper in July and September,”
“Tapering in December is supported not only by those at the Fed, like Esther George and Richard Fisher, who see it as good policy but also by some, like James Bullard and Jeremy Stein who see it as a way of repairing some the Fed’s damaged reputation.”


Ever since Chairman Ben Bernanke’s taper speech in May, financial markets have tried to second guess the timing of when the Fed would start reducing their monthly $85 billion of bond purchases, widely known as QE3, based on data releases.

Recent economic data releases have shown robust economic activity and is supporting a taper in December.


Economists at Credit Suisse wrote in a note:
“The best argument for a December taper is the risk that economic data weaken before the January FOMC meeting, closing what is now an open window for scaling back QE.”


Even on the fiscal front, these analysts felt that enough has been done to cheer the Fed to rein in their stimulus.


Beth Ann Bovino, U.S. chief economist at Standard and Poor’s
“Several reasons increase chances of a December move: The stronger jobs data through November. Other data that point to a private sector will to spend and invest, despite the shutdown.
All reasons that could make the Fed pull the trigger in December.”


Thomas Simons, a money market economist at Jefferies
As for why it (December taper) is becoming a more popular call, the data has been improving faster than previously expected and the budget deal in Washington lifts a good deal of fiscal policy uncertainty.



So much has been written about the timing of a mere $10 billion cut in the Fed’s bond purchases, that it’s worth remembering there will still be a whopping $75 billion sloshing around in the system even after that euphoric first taper.

With 56 of 69 economists expecting the Fed to end QE3 by end of next year, baby steps as early as December could give the central bank more time and flexibility to eventually close the current programme completely by then.


Carl R. Tannenbaum, chief economist at Northern Trust
“Policy uncertainty has hindered economic performance this year. If the Fed can bring a bit more clarity to the future of monetary strategy with its words and deeds next week, the clouds that have limited the vision of business people and investors could lift.”

Thomas Simons, a money market economist at Jefferies
“It will be gradual… another $5 bln in January and then $10 bln per meeting starting in March gets them close enough to $0 by the end of 2014.”


(Analysis by Ashrith Rao Doddi)

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