When Federal Reserve Board Chairman clarified his comments regarding the Fed tapering its $85 billion in mortgage back securities and long-term bond purchases as part of QE3 after its June meeting the consensus seemed to target the September FOMC meeting as the most likely first reduction.
Bernanke left himself some room by simply saying tapering could begin by yearend and also tied any reduction in purchases to economic data. The most important data point is jobs and the jobs data since Bernanke's June press conference has been disappointing. The August report, despite a reduction in the headline unemployment rate, missed expectation for nonfarm payrolls and payroll figures for the previous two months were reduced by 74,000. And those months already failed to hit the important 200,000 mark. In my mind that tipped the balance towards no tapering in September and perhaps only a minor reduction at some point before the end of the year. Adding to the uncertainty was the Syrian situation, which has the potential to disrupt energy prices and markets in general.
That is why I was somewhat surprised by those claiming surprise the Fed held off. The market did rally on the news, which indicates there was some expectation of a tapering but has since sold off on the underlying reasons why the Fed could not pull the trigger. In fact equity markets sold off on the poor August jobs numbers then quickly recovered, which I assumed was a market reaction to at least one more month of.
I pointed out in my video with Jill Malandrino of Options Profits that the last thing the Fed wants to do is to reduce its purchases only to see further economic weakness and have to add back some purchases.
The Fed is now five years deep in its extraordinary policy moves, six years if you count the auction facilities it added in light bank solvency issues in 2007. They expanded access to its discount window, extended the terms to 30 days from overnight, reduced the Fed Funds rate to zero, pledged to keep rates there out several years, initiated QE1, QE2, Operation Twist and QE 3. It has done all this while talking up the economy, which it claims is in recovery while acknowledging the tepid nature of that recovery.
Quantitative easing is really its only remaining bullet and with Congress unwilling to provide any economic stimulus, the Fed will not be too willing to let go of its last remaining policy tool.
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