Thursday, September 19, 2013
The markets are happy, but the Fed’s decision is problematic on several fronts, the most important being that it runs counter to their expressed desire for transparency and better communications with the markets.
They had prepared the markets for the start of QE wind-down, but instead surprised everyone by deciding to wait a bit longer. I was left scratching my head trying to figure out what would an additional month or two of bond purchases achieve that a full year of QE didn’t. Importantly, the economic outlook is as good or as bad as it was back at the time of the June FOMC meeting, notwithstanding the modest bump up to the Fed’s 2014 GDP outlook then and the modest downgrade to the same this time around.
My reading of the Fed’s plans was that they wanted to start getting out of the QE business as long as the economic outlook remained stable. A stable economic outlook isn’t necessarily a higher growth trend line, but rather a sustained growth trajectory with diminished downside risks. And that’s exactly what we have at present. Yes, there is a Washington DC fiscal drama on the horizon (budget/debt ceiling questions) that add to risks for the economy, but overall economic fundamentals remain very favorable.
In the run up to the Fed announcement, I would have described a ‘no Taper’ decision as a net negative for the markets, as it could potentially be interpreted as showing less confidence in the economic outlook. But markets across the board cheered the announcement in Wednesday’s closing session and appear on track for further gains today. Bernanke disagreed with a questioner in the press event who suggested that this decision made the Fed’s eventual exit plans that much more complicated. But the stock market’s positive reaction notwithstanding, there is no other way to see this unfold in the long run.
Director of Research