Fed Taper? It’s still too soon.
Most surveys of respected economists still agree that the on Wednesday the Federal Reserve Open Market Committee (FOMC) is going announce that the Fed will start tapering their buying of bonds also known as quantitative easing, the powerful weapon that they have used to keep interest rates low in order to stimulate the economy. While this needs to be done at some point for the purposes of preserving their balance sheet and eventually staving off inflation, this months meeting of the FOMC is the wrong time to start. There are a few key reasons including some data just released today
1) Inflation still isn’t a threat. The indicators for rapidly increasing prices aren’t there. The core PPI(Producer Price Index) which measures the cost of producing goods and services (excluding fuel and food) is up only 0.1%, which is practically nothing. Retail sales (excluding automobiles) were also increasing at the same anemic pace. Both of these numbers are indicators not only inflation, but of the direction of economic growth in the months to follow. The next big measuring stick for inflation is the CPI (Consumer Price Index), which isn’t going to be released until Tuesday when the Fed meetings begins.
2) We’re confident but not that confident. While consumer confidence remains high, this month’s number really missed the mark. While 76.8% seems like a lot of American’s are confident in the economy, that number is more than 5% below last month’s 82.1%,, meaning that 1 of every 20 American’s went from having faith in the direction of our economy to losing that faith over the last month It’s also 5% below the 82% level of confidence that most economists expected.
3) It’s time to talk about the debt ceiling. Bonds are debt, a promise to repay an investor principal and interest on their investment. Most experts agree that there will be a contentious fight, when it’s time to approve another increase in the debt ceiling. Last time this debate occurred, the US had it’s credit down-graded by one of the three major bond rating agencies, This gave pause to the institutions and people who buy bonds. By tapering the number of bonds purchased by he Federal Reserve at the same time, rates for treasuries and home loans could rise much quicker than the Fed would like.
4) Most families still aren’t better off than they were at the start of the economic crisis. While incomes have increased since the start of the economic crisis, most of those increases have been realized by the top 10% of US earners. Excluding that top 10%, real income has only increased by about 1%. Affordability in a rising rate environment can be further impacted as, particularly in the housing sector, stalling the housing recovery that began 2 years ago
While the Federal Reserve can’t keep purchasing bonds forever to help keep our economy going, timing and the pace of tapering will be important as to the impact on our country’s economic health. The next several months will be very telling, and as Chairman Bernanke’s tenure as head of the Fed draws to a close, we could even see a shift in the Fed philosophy on that tapering in the middle of the process.