“Grant me chastity and self-restraint, but not yet.”
-St. Augustine of Hippo, from Confessions.
As St. Augustine spoke of the need for restraint, so also the Fed has spoken of its need to begin restraining its large scale asset purchase program. Though the initial bond-buying program may have helped stimulate demand in 2010 and 2011, keeping it going is now doing very little to stimulate economic growth and employment. In its announcement September 18 the Fed showed that it was as reluctant as the great Saint to implement restraint by tapering the size of its asset purchases; its message was “not yet”. Critics of the Fed believe the Fed’s unconventional program creates economic imbalances, stokes inflation, and provides markets a short-term, unsustainable “sugar high”. The unconventional program will continue, at least for a while. Markets were positively surprised by the announcement.
This week we examine three articles and subjects related to the Fed tapering its asset purchases. Liz Ann Sonders of Charles Schwab provides a good perspective on the Fed’s rationale for saying “not yet”. This is a short read and well worth the time. Another perspective for saying “not yet”, through British lenses, comes from The Economist. This article focuses on risks the Fed is trying to mitigate by maintaining current policy a while longer. Finally, we provide a link to the announcement, itself worthy reading.
When Doves Cry “Not Yet”. Liz Ann Sonders of Schwab believes that, in referencing ‘tightening of financial conditions’ in the Fed statement, “the Fed may be sending a signal that the bond market over-reacted when the 10-year yield spiked to nearly 3%.” In downgrading its outlook for the economy “it’s also likely they opted not to taper so as not to contradict their less optimistic forecast.” In addition, “short-term rates are likely on hold for a lot longer than many thought; and will rise slowly when tightening begins…what we now face is a lingering of uncertainty regarding the timing of tapering…I remain very optimistic about the stock market; but the hope that this was going to be the lifting of one of many uncertainties has clearly not panned out.”
Septaper surprise. According to the writer, the Fed is attempting to balance a number of perceived risks, the most important of which is the state of the labor market, where the labor market participation rate has fallen to a 35 year low. Another risk is “Congress’ inept policy-making—with a government shutdown looming, easing of sequestration seemingly off the table, and a debt-limit fiasco not outside the realm of possibility, the Fed has determined that better-safe-than sorry is the right way to proceed now.” A third risk is that the Fed revised its economic forecasts downward. A final risk is that the rise in bond yields “were dangerous enough to require dampening—through the choice not to taper.”
Federal Reserve issues Federal Open Market Committee statement. The Fed announcement can be found at this link:
And in case you missed it, click here to read last week’s blog post which focuses on making your own luck in a tough job market.
We hope you enjoy reading these articles along with us and that you find them informative. Please forward this to your friends and family.
J. Mark Nickell & Co.
Disclosure – The articles mentioned in This Week with J. Mark Nickell & Co. are for information and educational purposes only. They represent a sample of the numerous articles that the firm reads each week to stay current on financial and economic topics. The articles are linked to websites separate from the J. Mark Nickell & Co. website. The opinions expressed in these articles are the opinions of the author and not J. Mark Nickell & Co. This is not an offer to buy or sell any security. J. Mark Nickell & Co. is under no obligation to update any of the information in these articles. We cannot attest to the accuracy of the data in the articles.