Fed's Dovish Turn Leaves Economists Mulling Taper Timing

Friday, 20 Sep 2013 02:25 PM

 

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The Federal Reserve's surprise move on Wednesday to postpone the start of the wind down of its monetary stimulus of the U.S. economy has left Wall Street economists puzzled about the central bank's next move.

Investors had been expecting the Fed to announce the start of a reduction in its monthly purchases of $85 billion of Treasurys and mortgage-backed securities, after comments by Fed chairman Bernanke as early as May this year.

Yields on U.S. Treasury debt had risen over the summer as a result of the market's expectation that the so-called "taper" would begin late this year, and capital had started to move out emerging markets as returns on safer investments rose.

Editor’s Note: New Video Exposes a ‘Great Retirement Heist’

According to a Reuters poll on Wednesday, economists at 9 of 17 primary dealers surveyed after the Fed announcement said the central bank could announce such a taper in purchases at the end of their December 11-12 policy meeting, although most emphasized their forecasts were very far from certain.

Economists at five dealers said they were discussing the Fed decision and could not make a forecast at this time.

One economist said the Fed could announce a "taper" of bond purchases at an October 23-24 policy meeting, while one said it could happen in the first quarter of 2014 and one said the second quarter of 2014.

That compares with a similar poll on September 6 in which 13 of 18 dealers forecast a taper in purchases would be announced at Wednesday's meeting.

The Fed on Wednesday expressed concern that the sharp rise in borrowing costs in recent months could slow economic growth and the central bank said it will continue to closely monitor economic data for evidence of improvement in labor market conditions.

"They are specifically concerned about how high interest rates have moved and also about any further tightening in fiscal policy. Once these issues are cleared up, they'll begin the tapering process," said Michael Moran, chief economist at Daiwa Securities America in New York.

The Fed's emphasis that it would rely on future economic data made it difficult for economists to guess when its bond purchases might be scaled back.

"Couch all this by saying the extreme emphasis on the data makes making these predictions that much more difficult to make and subject to change," said Thomas Simons, economist at Jefferies & Co. in New York.

Recent suggestions from Fed officials that a scaling-back of purchases could begin late this year with an end to the program sometime in 2014 had stoked market expectations for the announcement to be made on Wednesday and the decision not to taper left some economists confounded.

"The decision to hold off on tapering seems to be related to the rise in rates, which they are now concerned could sap the economy's momentum. Well, rates will back up again the next time they hint at tapering, so will another rise in rates then cause them to pull back on tapering?" asked Omair Sharif, economist at RBS in Stamford, Connecticut.

While the Fed's monetary policy committee will meet in October, several economists emphasized the bank was unlikely to announce any cuts in purchases at that meeting because no press conference is scheduled for the chairman at the meeting's conclusion.

If the Fed were to schedule such a press conference, it would be taken as a tip-off that the tapering announcement was imminent, subsequently roiling financial markets in a way the Fed does not want to, said Aneta Markowska, economist at Societe Generale in New York.

A post meeting press conference is scheduled for the December meeting.

There are 21 U.S. primary dealers, but not all of them respond to the poll.

Editor’s Note: New Video Exposes a ‘Great Retirement Heist’

© 2014 Thomson/Reuters. All rights reserved.

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