As strategists, economists, and commentators assess the economic fallout from the temporary shutdown of the U.S. federal government, a consensus of opinion is now pushing out the “Taper” of QE3, the Fed’s policy of printing money, to March.
There is a general belief that the data will not support a Taper at either of the two last Federal Open Market Committee (FOMC) meetings chaired by Ben Bernanke. And, it would certainly be a surprise to see Janet Yellen push for a Taper at the first FOMC meeting that she chairs in January (Yellen may be self-conscious of her reputation as a Super Dove and may try for dramatic gesture in an attempt to counter that, but I think that it would only be a small probability).
March will represent ten months of lapsed time from Bernanke’s first mention of a possible Taper. When he first began climbing down from that suggesting, I had a sense that he wanted to communicate some sort of conclusion to a market that had become addicted to the notion that QE would continue indefinitely. A while after his initial comments, Bernanke went to great lengths to tell us that a decision to Taper would be “data dependent.”
The real question is “how amazing good will the data have to be in order to initiate Tapering?” The economy is never perfect and it is very common to have a few concerns here and there regarding employment and economic growth. There is a sense that the Fed is looking for “Goldilocks” data. With that in mind, it will always be possible to find enough grey clouds in the data to forestall Tapering.
We know that the temporary Band-aids applied to the government shutdown and debt ceiling are set to come off in January and February respectively. So, there will be more threats to employment and economic growth to contend with in the New Year. And, as 2014 is a mid-term election year in the U.S. and since the Fed has traditionally avoided major policy announcements in the run-up to elections so as not to favor one party over another, the window of opportunity for a Taper may end at the June FOMC meeting.
Although consensus expectations are focusing on the March FOMC meeting as the beginning of the Taper, it may very well be the April or June meetings. And, if not those meetings, they we might be looking out to the December 2014 meeting. There is a possibility that it could happen. And if it does, total money printed from all the QE policies going back to November 2008 will total $4.5 trillion.
The one upshot of all this is that at least stocks will benefit from the new “Yellen Put” which will replace the Bernanke Put, which succeeded the Greenspan Put. The upside for stocks may be limited by anemic earnings growth. But, at least the downside might be limited by the continuation of QE3.
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