Round and Round They Go on Tapering
They came, they talked, they did nothing. And boy, was there much ado about the nothing part. I'm going to save you the trouble of reading the minutes of the Federal Reserve's Sept. 17-18 meeting, whose release was overshadowed by the nomination of Janet Yellen to be the new Fed chairman. Instead, here's my summary of the committee's view on the economic situation and the lengthy back-and-forth on whether to taper asset purchases.
Economic conditions: Things weren't great to begin with, and they may have gotten slightly worse since the last meeting. "Mixed" is the best we can say about the labor market, consumer spending, business investment, housing, foreign economies. Some of the "mixed" readings on the economy were actually "disappointing."
Financial markets: Rising long-term interest rates could be a reflection of growing confidence in the expansion (a positive), or they may hamper the housing recovery (a negative). The tightening of financial conditions is clearly a negative. (Editor's note: It's not clear financial conditions have tightened.)
The labor market: We're not sure the preconditions we set for reducing the pace of asset purchases have been met.
Fiscal policy: Uncertain. See headwinds from the sequestration and tax increases and add in the potential for a government shutdown and impasse on the debt ceiling.
Financial stability: Some potential risks from the rise in interest rates, increased volatility and reduced liquidity.
Overall uncertainty: About the same as it's been over the last 20 years.
The pros and cons of tapering:
Pros: We started talking about it months ago. The markets are prepared for it. If we don't, it will look as if we are pessimistic about the economic outlook.
Cons: In light of the recent mixed data, a cautious approach is warranted.
Communications policy: See "Pros" above. Also, if we don't taper now, we'll have more time to perfect our communications and clarify the difference between tapering and tightening, which could prevent "an undesirable tightening of financial conditions." (Editor's note: Financial markets understand the difference. They just don't agree with you about the path for the funds rate.)
All this over what was likely to be a $10 billion reduction in the $85 billion of monthly purchases of Treasury and mortgage-backed securities. Most meeting participants still expected economic conditions would allow for a reduction in the pace of asset purchases this year and the completion of the program in mid-2014. The dearth of data during the government shutdown pretty much puts that plan on hold.
If you don't believe that I did you a favor by summarizing the conclusions, take a look at this one passage:
With many outside observers expecting a decision to reduce purchases at this meeting, some participants emphasized a need to clearly communicate the rationale behind any decision not to do so, in order to avoid conveying a message of pessimism regarding the economic outlook or to reinforce the distinction between decisions concerning the pace of purchases and those concerning the federal funds rate. One participant suggested that postponing the reduction in the pace of asset purchases would also allow time for the Committee to further discuss and to implement a clarification or strengthening of its forward guidance for the federal funds rate, which could temper the risk that a future downward adjustment in asset purchases would cause an undesirable tightening of financial conditions.
I rest my case.
(Caroline Baum is a Bloomberg View columnist. Follow her on Twitter.)