Peter Warburton to Moneynews: Taper Talk Led to 'Massive' Market Reaction

Friday, 05 Jul 2013 06:22 AM

By Glenn J. Kalinoski and David Nelson

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The extent of the market's reaction to rolling back quantitative easing has "jarred" the Federal Reserve, according to economist Peter Warburton, director of Economic Perspectives, a U.K. consulting firm.

"When they were trying to send a mild message, the market took a massive message," he told Newsmax TV in an exclusive interview.

The Standard & Poor's 500 Index has declined 3.3 percent since May 21, the day before Fed Chairman Ben S. Bernanke said the central bank may taper bond purchases if the U.S. economy improves in line with forecasts, according to Bloomberg News.

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Warburton said Fed board member Jeremy Stein "possibly has given a better speech … and a kind of clearer statement."

Editor’s Note: Put the World’s Top Financial Minds to Work for You

"He said that further down the road the more information the market demands about the conditions that would lead us to reduce and eventually end our purchases, the more information we have to give," Warburton said.

Warburton added that Stein is "kind of defending" Bernanke.

"Basically, Bernanke's mentioned a 7 percent [unemployment] figure for effectively when the QE purchases would be phased out … maybe around the middle of next year," Warburton said. "It's a brave attempt to clarify what Bernanke has said and tried to do.

"But where the Fed [has] failed, clearly — and these latest efforts haven't really made much difference to what bond deals are — is to separate the timing of the phasing out of the asset purchases and the timing of when the first interest rate rise would come," he said.

"The Fed [has] been trying to separate those two things and so far they've failed."

Employers in the U.S. added 175,000 jobs in May while the jobless rate rose to 7.6 percent as more Americans looked for work, according to Bloomberg.

"Not only are they trying to calm the markets down, but there's a reality here, which is that there's a lot of leveraged investment applied to the Treasury curve and now it's just too dangerous to go back in," Warburton said.

"It may not be until September that the actual tapering or scaling back … takes place and certainly Jeremy Stein was steering us to September. Even if the Fed were to change course and do more QE, I don't think they'd have the traction now."

Settling the bond market will involve not getting "knockout" economic news.

"Some people are worried that because mortgage rates have gone back up and mortgage refinancing volumes have started to come down that maybe, in a sense, there's a natural break on how far Treasury yields will rise because if they're seen to have an effect [of] slowing the economy and making it harder to get unemployment down, then, clearly, that would seem to have a natural break on how far this can go," Warburton said.

Warburton was asked about addressing the fiscal issues.

"Most analysts would say that the U.S. [is] in a good position relative to what they thought it would be at the start of the year," he said.

"There's a bit of breathing space here before readdressing the fiscal issues. Tax revenues have come along, if anything, better than expected. They've had the windfall out of Fannie and Freddie. There's not a lot of pressure for them to revisit that just yet. Come October … the heat will be on again about whether there's more fiscal mending to be done next year."

Editor’s Note: Put the World’s Top Financial Minds to Work for You


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