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Wednesday, July 17, 2013

The taper

The question on many investors minds is whether the FED will start cutting back on QE ("the taper") this year or not.  Here is an excerpt from the minutes of the last meeting.

Given their respective economic outlooks, all participants but one judged that it would be appropriate to continue purchasing both agency MBS and longer-term Treasury securities. About half of these participants indicated that it likely would be appropriate to end asset purchases late this year. Many other participants anticipated that it likely would be appropriate to continue purchases into 2014. Several participants emphasized that the asset purchase program was effective in supporting the economic expansion, that the benefits continued to exceed the costs, or that continuing purchases would be necessary to achieve a substantial improvement in the outlook for the labor market. A few participants, however, indicated that the Committee could best foster its dual objectives and limit the potential costs of the program by slowing, or stopping, its purchases at the June meeting. 

So about half think it would be appropriate to end QE before year end.  That is not just a taper, but a full ending.  Clearly it is not just a couple of individuals thinking it is time to stop or cut back at least.  In a question and answer period Bernanke said 

 "Highly accommodative monetary policy for the foreseeable future is what's needed in the U.S. economy"

Traders took this to mean that QE was on for the foreseeable future.  Bernanke did not specifically mention QE.  He also has mentioned several times that he sees the low FED funds rate as being accommodative monetary policy.  Since he did not specifically mention QE we don't really know if he was referring to that or not in his recent comments that sent the market flying up.  With so many FED members questioning whether QE should be cut back or stopped completely I have to wonder if he was really talking QE.  

The FED under Bernanke does not like to surprise markets.  Therefore they usually start talking about an action before it happens.  They also usually send out mixed messages at first.  I assume this is to get some market participants to adjust to the change before others.  That helps to keep everybody from doing it at the same time.  Think back to last summer.  The FED members started speaking about QE.  There was talk of doing another QE program along with talk against it.  In the end come Sept. they initiated QE.  So now we have talk of tapering and talk against it.  Is it the same in reverse and tapering is going to happen this year?

I don't know if any tapering is coming soon or not.  It seems odd to me to have all this talk about it if they are not planning to do it soon.  If they keep sending FED people out talking about tapering I think it will be coming.


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