Tapering.

20th September 2013

Ian Copelin, Investment Director, my wealth, comments “I have been asked by a number of people if the tapering is now off the agenda?

Contrary to market consensus of a taper of between $10-$15bn (leaving QE at $70-$75bn per month), the US Federal Reserve refrained from tapering in this week’s Federal Open Market Committee (FOMC) meeting – please see yesterday’s update (19 September 2013).

The FOMC instead followed its stated policy of continuing to increase monetary stimulus while unemployment remains unreasonably high (above its stated target of 6.5% unemployment) and when inflation is well below its 2.5% target. For some reason this decision surprised markets.

In addition we have the fiscal negotiations on raising the US debt ceiling and agreeing a budget for 2014 (both of which need to be agreed by Congress within the next few weeks to avoid a government shutdown or default), coupled with the fact that the rise in yields on taper speculation since May immediately led to a weakening of the housing market.

All this highlights that it is currently not the appropriate time to taper and that the Fed clearly has no pre-set course for tapering.

I believe that this whole taper debate is as a result of a failed communication strategy and should never have happened. As soon as Ben Bernanke, the US Federal Reserve Chairman, made his statement in May, there was a parade of Fed officials playing down the statement and highlighting that monetary tightening wasn’t imminent – see the updates dated 26 June 2013 & 12 July 2013.

However, tapering will still have to begin at some point, but this week’s decision to wait serves to underline that the Fed will be cautious in reducing accommodation and will only do so when it believes the economy can obviously withstand it.

I would speculate that the earliest this could be is December (i.e. get past the debt ceiling negotiations in October and see if subsequent economic data in October & November is robust enough). However, this is probably too close to the end of Ben Bernanke’s tenure as the Fed Chairman, so the taper decision is more likely to be put off until early 2014 for the new Chairman to decide.”