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.
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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
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