Contrary to popular opinion the Federal Reserve’s approach to fiscal policy over the last year, specifically its third (or fourth by some accounts) round of quantitative easing (QE3) and its comments regarding unwinding the $85 billion in monthly fixed income purchases, has not been misleading or even confusing.
First off Fed Chair Ben Bernanke hinted that the Fed would begin to reduce its purchases sometime this year in Congressional testimony on May 22. This caused sharp downward moves in equities and Treasuries. At his June press conference Bernanke provided some more specifics, which led to further market gyrations. He anticipated beginning to taper before yearend and completely eliminating stimulus by mid-2014 but cautioned that it would be dependent on economic numbers, particularly employment and inflation readings.
Most analysis—I believe correctly—targeted the September meeting as the start of the taper. But in between there were two extremely poor unemployment reports for July and August. Just after we had a government shutdown and then a threat of default on our debt. Such a threat, however remote, tends to weaken demand from potential buyers of that debt. When a deal was struck ending the government shutdown and extending the debt ceiling it was very short-term—a budget extension just out to January and a debt ceiling extension to February.
At the time I believed this changed the game because the Fed would have to gauge the damage done from the shutdown and debt ceiling high wire act as well as the pace of the recovery and job growth.
I concluded that tapering would have to be put off until those deadlines were resolved. But the October and November employment reports were very strong and the November report—reducing the headline unemployment rate to 7% from 7.3% -- came on the heels of several strong economic reports including a better than expected revised Q3 GDP, and those covering the all-important housing sector. This caused many analysts to believe tapering was back on the table for the December meeting. I was not convinced but news on the budget deal left the Fed with no excuses to delay.
I have learned over the years going back to my Fed watching days on the Chicago Board of Trade’s bond floor that many commenting on and analyzing what the Fed is doing are not so much analyzing policy, but attempting to influence policy or at least influence public perception of policy.
One could trace Ben Bernanke’s and the Federal Reserve’s pronouncements regarding tapering from this past spring and it all led to a logical end with the FOMC statement from the December meeting.
Those who say different weren’t paying attention or had an ulterior motive.