as part of our
Here comes the Fed!
We're mere hours away from receiving a decision on the most
overhyped debate in recent memory:
"To taper or not to taper…"
Who does Bernanke think he is anyway, William Shakespeare?
The next policy announcement from the U.S. Federal Reserve's
Open Market Committee is due at 2 PM EST, followed by a
live media briefing
with Chairman Ben Bernanke at 2:30 PM.
But come on, people!
The Fed isn't cutting off the sauce cold turkey. We're talking
about tapering, here - perhaps as little as $5 billion per month
and no more than $20 billion per month.
So the Fed will
be propping up the market to the tune of $65 billion to $80 billion
The end result? The taper obsession gripping the market is
Or as Bob Doll, Chief Equity Strategist at Nuveen Asset
Management, says, "Eventually, we'll forget all about it."
Indeed! Heck, it's not even the most important announcement to
come out of the Fed today.
So what is?
~ Fed Focus #1: It's All About Economic Guidance
When Fed officials provide their policy update this afternoon,
we'll also get their first forecasts for economic growth for
The party line for many economists (and the Fed) has long been
that the U.S. economy will accelerate in the second half of this
Yet that's becoming harder to accept at face value given the
- Hiring recently tapered off. The economy only added 169,000
jobs in August.
- Consumers cut back on spending, with retail sales increasing
a measly 0.2% last month.
- And confidence appears to be waning. The preliminary reading
of the University of Michigan/Thomson Reuters Consumer Sentiment
Index for September fell to its lowest level in five months, at
Stephen Stanley of Pierpont Securities insists that "the languid
August results underscore the big picture point that I have been
hammering away at for a while: The vaunted second-half acceleration
in the economy ain't happening."
Will the Fed read the data the same way? If so, it could have
profound policy implications. Namely, it would warrant the Fed
stimulating the economy
by keeping interest rates at historically low levels.
Bottom line: Any perceived economic weakness by the Fed should
show up in future guidance. The Fed currently expects GDP growth of
3% to 3.5% for 2014 - and 2.9% to 3.6% for 2015.
~ Fed Focus #2: Deciphering the Real Unemployment
Since the Fed launched QE3, the unemployment rate has dropped
from 8.1% to 7.3%. If it falls to 6.5%, by the Fed's own admission,
it's going to look to (finally) increase interest rates.
However, as I've noted before, the drop in unemployment is a
total crock. It's been caused by more and more Americans
of the workforce - not
Bottom line: Thanks to the sad labor participation rate, look
for the Fed to lower its 6.5% threshold. Otherwise, it runs the
risk of investors thinking the labor market is strong - and that an
interest rate hike is coming sooner rather than later. And that
would be downright irresponsible, given the data.
~ Fed Focus #3: Revisiting Inflation Limits
The Fed has conceded that persistently low inflation could be
problematic. And that's precisely what we've got.
Case in point: In April, inflation checked in at a shockingly
low level of 0.9%, year-over-year. It's now only hovering around
1.2%. And that's well below the Fed's stated inflation target of
Bottom line: Expectations for inflation are key for determining
when to raise interest rates. So look for the Fed to dial in its
guidance to also include a lower bound for inflation.
) suggested a level of 1.5%, below which the Fed won't look to
raise interest rates, either. We'll soon find out if the Fed
agrees, or if it has another target in mind.
The True Fed Dilemma
A Fed taper is a foregone conclusion. It's coming within months.
However, the more significant event - an interest rate hike -
remains a moving target. Just ask traders.
Based on the most recent futures prices, there's a 55%
probability of the first rate hike occurring in December 2014, and
a 68% probability for it occurring in January 2015. Compare that to
a few days ago when the majority of traders expected the first
increase to come in October 2014.
Bottom line: The true Fed dilemma is
to raise interest rates. And that decision hinges on expectations
for the economy, inflation and the ever-fragile employment market.
So forget about the taper. Instead, pay attention to the Fed's
announcements on these three critical issues this afternoon.