And so the tapering process has officially drawn quantitative easing to an end.
The October FOMC statement is actually less dovish than many predicted and draws particular attention to the progress made by the labor market. The statement to wrap up QE is in a sense a fitting epitaph to the program. What the Fed manages to avoid is any reference to the global financial market turmoil witnessed earlier in October. Instead, they noted that, on balance, there had been “a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program”.
For sure, that’s a bullish view on the employment picture, but we emphasize that this steers a careful path between financial market tantrum and the overall impact the program has had, in its eyes, over the last several years. It’s another way of saying that two weeks of recent financial stress was insufficient to derail the U.S. recovery now in its fifth year.
In its first paragraph the statement changes language somewhat by noting that “underutilization of labor resources is gradually diminishing”, yet is not yet ready to change its downbeat assessment of the housing market. Its conclusion is that there remains “sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability”. In short, we don’t fear that this is as hawkish as the reaction in treasury prices seems to indicate. There is no inflation in sight and the committee went to the length of specifying that, “Market-based measures of inflation compensation have declined somewhat” while longer-term inflation expectations have remained stable.