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Last updated: August 29, 2013 5:36 pm
The prospect of the Federal Reserve “tapering” its monthly asset purchases has not only rattled Wall Street but also pushed US mortgage rates sharply higher and driven a savage sell-off in emerging markets. Might recent events persuade the US central bank to hold its fire?
Steven Ricchiuto, chief economist at Mizuho Securities USA, says recent data continue to point to an economy that cannot gain any more forward momentum than the 1.5 per cent to 2 per cent growth per quarter that has dominated since the recession ended in 2009.
“This is probably not the dataset the Fed was anticipating when the chairman laid out his taper framework back in June,” he says. “Yet the markets are still anticipating that the FOMC will opt to reduce its large-scale asset purchase programme in September or early October.
“This situation may have boxed the Fed in. We still believe the FOMC would be better suited in delaying until next year any tapering of the quantitative easing programme.
“Unless there is a major break in the August jobs report, we expect the 10-year Treasury yield to be at 3 per cent by the time the committee begins its September deliberations.”
Alan Ruskin, a strategist at Deutsche Bank, says that, while the Fed still looks likely to move soon, there is a growing sense that the mixed nature of recent data and the turmoil in emerging market assets – as well as the situation in Syria – could influence its timing.
“Clearly, the next payroll data will still be the key,” he says. “Any tapering delay on the surface would seem like a risk-positive event but many participants will see this as just a delay of the inevitable, in which case it is merely going to keep uncertainty as a lingering factor.
“In that sense, delaying tapering may get a short-term positive risk response, but would ultimately play out as even more risk-negative. Under these circumstances, it is going to be hard for the Fed to indirectly support EM currencies, short of making it clear that tapering will be delayed for an extended period – which is not going to happen.”
Tom Porcelli, chief US economist at RBC Capital Markets, argues that the minutes of the Fed’s July policy meeting, released last week, provided confirmation that tapering will begin over the next few months.
“This will transpire even in the face of what is likely to be a markdown to the Fed’s economic forecast,” he said. “In other words, for all the talk about data dependency, whether they taper or not or how soon will not merely be about the data.
“We suspect the FOMC is worried enough about creating asset bubbles, via too easy policy, that the data will not need to sharply exceed expectations for tapering to begin. The Fed is likely to taper if the data are merely ‘not bad’.
“The mantra will be more focused on economic momentum than the actual degrees of strength in the near-term. Tapering will come even if the Fed’s forecast proves too optimistic.”
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