Ponsi: What to Expect From the Fed
NEW YORK (TheStreet) -- So what's it going to be? Will the Federal Reserve, inspired by a percolating job market, cut quantitative easing by a significant amount? Will we see a taper in the $10 billion to $20 billion range? Will the Fed present a definitive plan for future reductions in its bond-buying program?
Here's my call: There will be either no taper today or a symbolic $5 billion "mini" taper, at most. And the Fed will provide no significant forward guidance -- at least I hope it won't.
James Bullard, president of the St. Louis Fed, laid out the case for a "mini" taper on Dec. 9, saying, "A small taper might recognize labor-market improvement while still providing the committee the opportunity to carefully monitor inflation during the first half of 2014. Should inflation not return toward target, the committee could pause tapering at subsequent meetings."
The data just don't warrant a deep cut to the Fed's bond-buying program. Yes, the employment picture has improved, with nonfarm payrolls averaging more than 200,000 per month over the past four months. Last month's reduction in the unemployment rate was accompanied by an increase in the participation rate, which is a welcome sign. Counterbalance that positive news with a GDP report skewed by excessive inventories and we have an economy that is moving forward but at an unsteady speed.Now consider inflation, or the lack thereof, and the case for tapering becomes even weaker. Tuesday, the Consumer Price Index (CPI) printed a doughnut, 0.0%, in November. Inflation at the consumer level is running at a meager 1.2% annual pace. With that annual figure well below 2%, and with recent sharp decreases in inflation in some European countries, there is no pressing need to hit the brakes on stimulus. Where does the incoming Fed chair, Janet Yellen, fit into the equation? Even though Yellen hasn't yet assumed the chair yet, her shadow looms large. Would it make sense for Bernanke's Fed to make any move Yellen would later need to reverse, or map a future course of action that might conflict with Yellen's view? What if Yellen's timeline differs from Bernanke's? Speaking of timelines, the taper timeline sounds good in theory, but it won't work well in practice. Consider the following statement: "In the next few meetings, we could take a step down in our pace of purchase." Bernanke made that statement nearly seven months ago, on May 22. I'm thankful that the Fed didn't detail any forward guidance for tapering at that time. Clearly, Bernanke and his colleagues at the Federal Open Market Committee don't have a crystal ball, yet that's exactly what they'd need to provide an accurate tapering timeline. There are simply too many variables in our massive and diverse economy. If the Fed does create a timeline, it will require constant revision as new data are introduced. Imagine the knots we could twist ourselves into trying to decipher how each subsequent morsel of datum might affect various points along the proposed timeline. Let's hope the Fed realizes this type of transparency would be more of a hindrance than a help.
--by Ed Ponsi in New York
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