In the end, “September taper” never was. The Federal Open Market Committee (FOMC), the Federal Reserve’s rate-setting body, announced on Wednesday it will keep the pace of its monthly asset purchases steady, at $85 billion a month in Treasurys and mortgage-backed securities.
The vast majority of Fed watchers had their money—often, literally—on a taper decision. So what possessed the Fed, which normally abhors surprises, to pull this trick on investors?
After parsing the FOMC statement and listening to Bernanke’s post-meeting presser, I have a glass half-full interpretation. I think the decisions is less about the health of the U.S. recovery and more about the Fed’s inability to predict that its taper talk would push up long-term rates to the extent that its has and that Congress continue to squabble about fiscal policy.
Here is where I get my hints:
1. A close comparison of how the FOMC statement changed from the July meeting shows that the Fed actually felt more optimistic about the economy today than it did two months ago. In July it described the pace of economic growth as “modest.” In September, it upgraded that assessment to “moderate.”
2. The FOMC statement noted that “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.” Bernanke confirmed during the press conference that “tightening of financial conditions,” refers, indeed, to the steep rise in long-term bond yields and mortgage interest rates witnessed since the Fed mentioned the possibility of tapering back in May. The chairman called such movements “unwelcome.” Bernanke added that the FOMC is “somewhat concerned” about mortgage rates in particular, which could weigh on the housing recovery.
3. The FOMC also noted that “fiscal policy is restraining economic growth.” This isn’t exactly new: The Fed has long been complaining that Congressional battles over the deficit, as well as state and federal spending cuts, have been watering the positive effects of monetary policy stimulus. Today, though, Bernanke specifically mentioned the looming threat of a federal government shutdown and, even more so, another Congressional showdown of the debt ceiling as causes for concern.
In short, the economic data, taken in isolation, might have been good enough to satisfy the FOMC that taper could begin. After all, the labour and housing markets have held up pretty well since Bernanke first mentioned the possibility of scaling back asset purchases. The two biggest bumps on the way to tapering, it seems, are Congress and the Fed itself.
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