Fed
TAPERS; Bernanke and Co. Surprise Many
Written: Evening of September 18, 2013
I titled my previous blog, Can We Taper? My response was no,
and I explained in quick detail why the FOMC wouldn’t or couldn’t initiate a
reduction in its asset purchases just yet. Well I was wrong. Maybe not
completely but nonetheless, the Fed announced its plan to begin reducing the
size of QE and this post explains my take on the market moving events that
occurred earlier today.
Let me first summarize the key data Dr. Bernanke reported
today in his final press conference as chairman of the FOMC. Below is a bullet
point summary.
·
The Fed announced that it would begin a
modest reduction in asset purchases (QE program) that would begin next month to
the tune of 10 Billion Dollars. This would incorporate a decrease of $5B in
Treasury purchases and $5B in Mortgage Backed Securities.
·
The committee expects:
o The Unemployment Rate to continue decreasing
to a level between 6.3 – 6.6 % by the end of 2014 and reach a long run level
(past 2016) of 5.2-5.8%
o Inflation
to reach its objective target of 2% by 2016
o GDP
growth to finish 2013 between 2.2-2.3%, 2.8-3.2% in 2014, and 2.2-2.4% in the
long run
·
Dr. Bernanke stated that the economy
had created over 2.9 million jobs since the recession and unemployment has
dropped a whole percentage from 8% to 7% during this time period.
·
Non-farm payroll measures have read on
average near 200k each month since QE3 began.
I stated in my last post that I wouldn’t be completely
surprised if the FOMC began tapering, however I didn’t expect it. My view was
that although improvements in economic data were present, we needed to sustain
those economic measures for at least a couple more months before the Fed
tapered its highly accommodative monetary policy. I also wrote that the
rhetoric of the statement would be what influenced the markets and that was
indeed the case today as well.
Lets touch on Dr. Bernanke’s rhetoric. The chairman
acknowledged that growth over the past few years has been slow. He cited the
housing bubble, the subsequent financial crisis, contractionary fiscal policy
and also some bad luck as examples of that. He also acknowledged that labor
market conditions have been tough and stated that QE measures along with
decreasing fiscal drag out of Washington should help improve these conditions.
He explained that although a reduction in asset purchases will begin next
month, QE is still appropriate for the economy as national production has been
sluggish. He further stated that with unemployment and inflation still not
reaching the fed’s target values for each respective measure, the committee
will continue to purchase Treasuries and Mortgage Backed Securities to some
extent.
As far as for a continued taper, he stated that, “further
measured steps” that would be “deliberate and data dependent” would be taken in
the future. He emphasized, “asset purchases are not on a pre-set course” and
that the FOMC expected to “
Maintain the Federal Funds Target Rate, in its current near
0 range, well past the time unemployment falls below 6.5%, especially if
projected inflation continues to run below 2%.”
As I listened to the chairman speak and jotted down notes of
his press conference, I felt like I kept hearing reasons why the Fed SHOULD NOT
taper. Yet we did, and so my first thought was maybe the committee is now
starting to see the risk and feel the pressure of a massively ballooning
balance sheet? I then started thinking about the motive for this decision. Did
most voting members of the committee simply believe it was a healthy and
appropriate time to begin tapering the asset purchases of the Fed; or rather,
suddenly realize the above-mentioned risk of a highly accommodative monetary
policy, and decide to taper in defense of another financial type crisis? I
personally think it was a little bit of both. I am under the impression that if
we could eliminate the affects of the recent government shut down, this policy
decision would have been suspected by most. But the shut down threw off
economic measurements, and so I personally believed the Fed would have wanted
to wait longer for more data to confirm a decision. I think this occurrence
forced a bad hand on the committee; who may have seen the data skew from
Washington’s shutdown as far too much a risk, and needed to maintain a cutoff
for balance sheet increases. Also, this may have been an opportunity to control
risk using their balance sheet while also supporting markets through dovish
commentary. The chairman talked about interest rates still remaining low for a
considerable period and that a major reason rates would remain low was due to
the substantial holdings that the Fed is currently responsible for. Equity markets
would still enjoy the benefits of cheap capital markets, which would continue
to help stimulate them. In my opinion the press conference was rather dovish.
It seemed the committee wanted to assure investors or other market participants
and citizens that accommodation in the markets will most certainly still be
available. While giving this assurance, they were able to also provide a slight
reduction in purchases to show hawkish market participants that the reduction
process has begun. This process could have giving comfort to both camps of the
taper debate, enhancing the broad based rally we saw earlier in equities.
Todays FOMC press conference was very crucial. My perception
was that the Fed still maintained a dovish outlook, but had realized it needed
to begin de-risking, in order to avoid any future, major economic disruptions.
The job that Fed committee members take on is one of great stress and pressure,
yet I will say I feel confident in those members. This policy move surprised me
along with many others, but like many things, the move makes more sense in
hindsight. The recent economic data displays clear improvement, and although I
would have liked to see a few more releases of new data, I must tip my hat to
Dr. Bernanke and co. They found a creative way to continue stimulating markets
and the general economy while also slowly beginning the process of shrinking
the size of their balance sheet. Most importantly… the markets were MUCH HIGHER
today! We got a nice little rest over last week, and boomed today. Lets ride
the uptrend through Christmas now.
