While expecting Q1 GDP growth to be revised down to an annualized rate of -2% from the current -1%, expect the Fed to keep tapering on autopilot and reduce it by another $10 billion to $35 billion/month at the conclusion of the June 17-18 meeting. Markets will now be laser-focused on how and more importantly when the Federal Reserve plans to engineer the first increase in short-term rates since 7/06.
Tag Archives: tapering
Bonded Bernanke
By perfectly calibrating his message, this time, Bernanke was able to taper yet see equities climb by 1.75% and bond prices barely budge. Quite a difference from this past May. By combining tapering with a commitment to keep short-term rates low into 2015, Bernanke has reduced uncertainty and compensated markets for the knowledge that QE will shortly be history. He’s also emphatically saying that 2014 will be pretty good. Bravo!
Fed Funding
Reading the just released minutes from the most recent Fed meeting, it sounds like when the Fed starts reducing its monthly purchases of $85 billion in treasuries and MBS, the Fed will concurrently announce that it will keep short term interest rates abnormally low for a long time to reassure markets it will continue its very accommodative policies. My take: taper in March, Fed Funds near zero for years.
Taper Tantrum
For the Fed to taper their purchases of Treasuries and MBS, GDP growth needs to be above 2.5%, net new job growth needs to approach 200,000/month, the annual inflation rate should be nearing 2%, and the unemployment rate should be below 7.3%. These thresholds are still a ways off. Thus, the probability of a December taper is just 15%, but it is highly likely that tapering will commence by March.
Taper Tiger
With a drop in the labor force participation rate to 63.2%, its lowest level since 8/78, the creation of only 169,000 net new jobs in August and revisions subtracting 74,000 new jobs in June and July, it’s now a toss-up whether the Fed begins tapering in September. If they do, expect the Fed to reduce its Treasury purchases by just $10 billion with mortgage backed securities purchases remaining unchanged.
Hazardous Headwinds
While the economy is improving, it’s now facing huge headwinds. They include the need for a Continuing Resolution, hitting the debt ceiling, Syria and its impact on oil prices, who will be the next Chairman of the Federal Reserve, the start date of tapering, fear about whether Abenomics will work in Japan, and concerns about US interest rate hikes reverberating across European peripheral nations and emerging-markets. Expect increased short-term volatility.
Interesting Jobs
With 195,000 new jobs in June, the average monthly gain in the first half of 2013 is 202,000 – way up from the 130,000/month pace when QE3 began. Moreover, the unemployment rate remained unchanged, because 177,000 people joined the labor force! Unfortunately, 112,000 of the new jobs were either in leisure and hospitality or retail trade, both low-paying sectors. Three more months like this and tapering probably starts in September.
Fractious Fed
With the Fed (and everyone else) forecasting improved economic conditions in the second half of ’13, it’s not surprising that the Fed again reiterated that it MAY start tapering QE3 later this year. Interestingly, the Fed has been consistently over-optimistic when it comes to forecasting. Thus, I still think tapering commences no earlier than November. But, if monthly job creation numbers stay above 183,000/month, tapering could commence in September.