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Next stop for tapering watchers: December.
To the considerable surprise of most observers (but to be fair, far from all), the U.S. Federal Reserve did not announce, at the end of its two-day meeting Wednesday, the start of a gradual reduction in its quanitative-easing (QE) program of government bond and mortgage-backed-security purchases, commonly known as tapering. It's certainly a significant head-fake from the Fed, which had signalled months ago that September was the likely point at which the QE taper would begin – and had said little in recent weeks to dissuade financial markets from that assumption.
The post-meeting statement from the Fed's policy-setting Federal Open Market Committee (FOMC) was, as usual, brief, but does give us a glimpse into the Fed's thinking on delaying tapering a little longer. The Fed did signal, crystal-clearly, that its next move will be a taper; in place of the words "The committee is prepared to increase or reduce the pace of its purchases" from previous statements, the FOMC now talks about "judging when to moderate the pace of asset purchases" (my italics) – it's no longer a question of if, but when.
However, the committee is clearly worried about the potential economy-slowing effects of the ever-tightening belt of U.S. government spending. It is also nervous about the "tightening of financial conditions in recent months" – in the form of higher bond-market interest rates and, by extension, mortgage and other credit rates.
The Fed could easily have pointed to a host of recent, disappointing economic indicators as ammunition to justify postponing tapering. The August employment numbers – critical for the Fed, given that its guidance on eventual interest-rate hikes is tied to a specific unemployment threshold of 6.5 per cent – showed considerably less hiring that economists had anticipated, made worse by substantial downward revisions to the June and July numbers. The other key metric in the Fed's rate guidance, inflation, slumped to a year-over-year rate of 1.5 per cent last month. That's down from July's 2-per-cent pace, and far from the Fed's threshold of 2.5 per cent. In the past week, retail sales, housing starts and building permits have all been disappointing.
But the Fed didn't point to any of these. Indeed, it upgraded its description of the U.S. economic growth pace to "moderate" from "modest." The details from the FOMC's economic projections showed a slight dip in GDP growth projections for 2013 and 2014, but were somewhat more optimistic on the unemployment and inflation targets than the committee had been in its June projections. The economy, broadly speaking, is shaping up as the Fed had thought.
So, the focus is on risks, with government austerity front and centre. Washington is headed for another budget showdown some time in October, when it once again will likely bump up against its legislated debt ceiling. That will be cutting it way too close for the Fed to have any vision into the economic impact of a debt ceiling showdown's eventual outcome by the end of October, when its next policy meeting occurs.
Which leads us to the FOMC meeting after that, in December. This will be, essentially, Ben Bernanke's last meeting as Fed chairman; there is one more meeting at the end of January, just a couple of days before he vacates the office, but it seems unlikely he would choose his retirement party to begin a tapering program as a parting shot to his successor. The FOMC's December meeting is also scheduled to be followed by a press conference – something that won't happen after the October meeting – and it would make sense that Mr. Bernanke would prefer to begin tapering on an occasion when he will can immediately communicate his plan to the public.
So December it is, then. We have three more months to play the tapering guessing game.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe .
David Parkinson