Fed Watchers: Beware the Taper Worm

Following a big miss this September, analysts fear going too bold as they speculate on where the central bank will steer the economy next.

Yes, that's a seahorse, not a tapeworm, but did you really want to see a tapeworm?
National Journal
Catherine Hollander
See more stories about...
Catherine Hollander
Dec. 18, 2013, midnight

It’s this week’s mult­i­bil­lion-dol­lar ques­tion: Is the Fed­er­al Re­serve about to ease off its all-out cam­paign to lower un­em­ploy­ment?

All year, Fed watch­ers have been won­der­ing when Fed Chair­man Ben Bernanke would shrink a ma­jor piece of his stim­u­lus plan: $85 bil­lion-a-month as­set pur­chases in­ten­ded to lower long-term in­terest rates and spur eco­nom­ic growth. The Fed has been hint­ing for months that it will be­gin scal­ing back — or “taper­ing” — the pro­gram.

And with a strong jobs re­port for Novem­ber, some ana­lysts are pre­dict­ing the time to taper has come. The Fed’s policy-set­ting com­mit­tee on Wed­nes­day will an­nounce its next moves on mon­et­ary policy.

Taper-watch is hardly new; ana­lysts have been spec­u­lat­ing about the pro­gram’s de­mise since shortly after it began. And after a big miss in Septem­ber, watch­ers are wary of catch­ing the “taper worm” — the creep­ing sense that the Fed will im­min­ently pull back on its stim­u­lus, des­pite the fact that the cent­ral bank has kept them guess­ing.

In Septem­ber, many watch­ers were con­vinced it was time to taper, think­ing the im­prov­ing eco­nom­ic data and stable in­fla­tion meant the Fed would be ready to slightly re­duce its monthly pur­chases. But they got it wrong: The Fed stood pat, and left its $85 bil­lion pro­gram un­changed.

“People were burned by the non-taper in Septem­ber, so they’re hes­it­ant “¦ to think it’s Decem­ber,” said Joseph La­Vor­gna, chief U.S. eco­nom­ist at Deutsche Bank. La­Vor­gna be­lieves the Fed will de­cide to be­gin cut­ting its pur­chases by $10 bil­lion Treas­ury bonds a month. The Fed is also buy­ing mort­gage-backed se­cur­it­ies as part of the pro­gram, which is col­lect­ively known as quant­it­at­ive eas­ing. 

Eco­nom­ists at Gold­man Sachs, in con­trast, think the cent­ral bank is most likely to wait un­til spring. “We cur­rently ex­pect taper­ing to be­gin at the March 2014 [Fed] meet­ing, al­though a Janu­ary move is very pos­sible. We can’t even rule out a small move this week,” they said in a re­search note.

So fore­casts are mixed this time around, and it’s not just be­cause those who were wrong last time worry they’ll miss the mark again. The eco­nom­ic evid­ence is also mixed. The bond-buy­ing pro­gram was sup­posed to help the Fed achieve its con­gres­sion­ally set “dual man­date” of price sta­bil­ity and max­im­um em­ploy­ment. Lately, gross do­mest­ic product and jobs data have bested eco­nom­ists’ ex­pect­a­tions, but in­fla­tion is still run­ning be­low the Fed’s 2 per­cent tar­get.

“We think the im­prove­ment in the in­com­ing data has been suf­fi­cient just about to war­rant the taper now, but I think most people would say that this is pretty much a toss-up,” said Paul Ash­worth, chief North Amer­ic­an eco­nom­ist at mac­roe­co­nom­ics re­search firm Cap­it­al Eco­nom­ics.

“There are just times when Fed of­fi­cials go in­to [a policy-set­ting] meet­ing and there isn’t ne­ces­sar­ily a clear out­come in sight, and they prob­ably do have to sit down and dis­cuss it and come to a con­clu­sion and that de­bate could go either way, and I think this is one of those times,” he said.

Lay­er­ing onto the dif­fi­culty of fore­cast­ing the end of the pro­gram is that it’s the first ever open-ended bond-buy­ing pro­gram the cent­ral bank has ever con­duc­ted, so eco­nom­ists have no pre­vi­ous ex­per­i­ence to draw upon. Two pre­vi­ous rounds of quant­it­at­ive eas­ing were dis­crete pro­grams with a clear end date. The Fed said it would keep the latest up un­til there is “sub­stan­tial” im­prove­ment in the labor force, something it has de­lib­er­ately neg­lected to define in keep­ing with the open-ended nature of the pro­gram.

Many eco­nom­ists who do be­lieve the Fed will be­gin to taper this week say the first move is likely to be small, in the realm of a $10 bil­lion monthly cut, and that the cent­ral bank may try to off­set its de­cision by pledging to keep its bench­mark in­terest rate near zero for longer. Like the as­set-pur­chase pro­gram, the goal of keep­ing the fed­er­al funds rate low is to en­cour­age eco­nom­ic growth. The longer the Fed pledges to keep the rate low — a com­mit­ment known as “for­ward guid­ance” — the more likely busi­nesses and house­holds are to make the bor­row­ing and in­vest­ment de­cisions the Fed is hop­ing will bring the eco­nomy back to its pre-crisis strength. Most re­cently, the Fed has said it will keep the fed­er­al funds rate near zero un­til un­em­ploy­ment hits 6.5 per­cent (it was 7 per­cent in Novem­ber).

Wheth­er the Fed de­cides to get the ball rolling on the taper or to wait un­til next year, mar­kets may shrug. “I don’t think we’re go­ing to get an aw­ful lot of move­ment from mar­kets either way,” said Ash­worth, who says they’ve prob­ably halfway priced in the Fed’s de­cision.

And if the Fed de­cides not to pull back this week, the taper worm will be back soon. The next Fed policy meet­ing is sched­uled for Jan. 28-29, just days be­fore Bernanke’s term ex­pires.

What We're Following See More »
WORDS AND PICTURES
White House Looks Back on bin Laden Mission
8 hours ago
WHY WE CARE
NO BATTLE OVER SEATTLE
SCOTUS Won’t Hear Appeal of Minimum-Wage Law
10 hours ago
THE DETAILS

"The U.S. Supreme Court on Monday rejected a sweeping constitutional challenge to Seattle’s minimum wage law, in what could have been a test case for future legal attacks on similar measures across the country. In a one-line order, the justices declined to hear a case by the International Franchise Association and a group of Seattle franchisees, which had said in court papers that the city’s gradual wage increase to $15 discriminates against them in a way that violates the Constitution’s commerce clause."

Source:
DOWN TO THE WIRE
Sanders Looks to Right the Ship in Indiana
10 hours ago
THE LATEST

Hillary Clinton may have the Democratic nomination sewn up, but Bernie Sanders apparently isn't buying it. Buoyed by a poll showing them in a "virtual tie," Sanders is "holding three rallies on the final day before the state primary and hoping to pull off a win after a tough week of election losses and campaign layoffs." 

Source:
CONSTITUTIONAL CONVENTION IN JUNE
DC to Release Draft Constitution as Part of Statehood Push
10 hours ago
WHY WE CARE

"The New Columbia Statehood Commission—composed of five District leaders including Mayor Muriel Bowser, D.C. Council Chairman Phil Mendelson, and D.C.'s congressional delegation—voted today to publicly release a draft of a new constitution for an eventual state next Friday, at the Lincoln Cottage." It's the first step in a statehood push this year that will include a constitutional convention in June and a referendum in November.

Source:
ALZHEIMER’S OUTCRY
Will Ferrell Bails on Reagan Movie
10 hours ago
THE LATEST

Amid outcry by President Reagan's children, actor Will Ferrell has pulled out of a movie that makes light of Reagan's Alzheimer's disease. A spokesperson for Ferrell said, “The ‘Reagan’ script is one of a number of scripts that had been submitted to Will Ferrell which he had considered. While it is by no means an ‘Alzheimer’s comedy’ as has been suggested, Mr. Ferrell is not pursuing this project."

Source:
×