Tuesday, July 23, 2013

Will the Central Bank’s First Tapering Move Come in September?

by Joe Winter

Just last month, Federal Chairman Ben Bernanke made assurances that the high level of bond buying would begin to decrease later this year, with the aim of ending the controversial program by the end of Q2 next year. He didn’t give exact details as to when this tapering would begin, but we can guess that it’s likely to start in a matter of months, if mid-2014 really is a target. A sudden halt would of course be a dangerous move. Many are predicting September as the likely starting point, but how likely is this?

It’s important to note that any plans to begin tapering are subject to economic performances matching forecasts issued by the central bank. Things could still change.

The President of the Federal Reserve Bank of Philadelphia Charles Posser, believes that September should see the start of tapering actions, but he goes further; believing that the quantitative easing program should end before 2014. The $85 billion per month bond buying scheme is seen as an unorthodox method of stimulating the economy, and as a result, has many opponents, as popular as it is with certain entities.

Posser warns against “another housing boom”, a potential consequence of the bond buying. He’s not alone in believing that the practice should end by year-end. Last month’s Federal Open Market Committee saw nearly half of the participants press for it.

One of the FOMC’s primary concerns is that the Federal Reserve’s QE plan will be difficult to de-route the longer it continues, with the balance is currently at a hefty $3.5 trillion. Opponents are concerned that inflation may continue to drop if things carry on the way they are.

Plosser has also highlighted an issue with the way the Federal Reserve explains its forecasting, claiming that it contributes to confusion rather than clearly defining the outlook. The Fed chief has argued that while unemployment is above 6.5 percent and inflation is at or below 2.5 percent, there should be a definite commitment to interest rates being kept as close to zero as possible. It’s certainly likely that unemployment rate will continue to rise above that figure.

Of course, there are many who are comfortable with QE. This is clearly illustrated through market analysis and chart interpretation. The S&P 500 saw a drop immediately after Bernanke announced that tapering could begin later this year. Conversely, when James Bullard, president of the St. Louis Fed, suggested that QE might have to be ramped up if inflation slows, a bullish trend immediately emerged. PBC governor Zhou Xiaochuan, BOJ president Haruhiko Kuroda and ECB president Mario Draghi all issued more lenient outlooks on QE policy.

VGK, EWJ and GXC all saw exactly the same movement as their American counterpart.
So is September a realistic time for tapering to begin? There are certainly a lot of people that would like to know sooner rather than later, but the differing attitudes towards QE can make things difficult to say for certain. We know that Bernanke is open to tapering to begin by the end of the year, many in the FOMC want it to end by the start of 2014, and the markets still seem to appreciate QE.

Taking all things into account however, September does seem to be the most likely choice. There isn’t the same degree of pressure for QE to continue as there is for it to end by 2014. The FOMC should see to it that the final quarter would be a reasonable period of time for tapering to both begin and end.

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