Fed Won't Slow Easing Anytime Soon Thanks to Congress

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Ben Bernanke Holds News Conference After Fed Interest Rate Announcement
Mark Wilson/Getty ImagesFederal Reserve Chairman Ben Bernanke
By Patti Domm

"Taper talk" could pretty much be dead until next year.

Thanks to the dysfunction in Washington, many Fed watchers now see the first taper in the Federal Reserve's bond buying coming sometime later than expected -- certainly not before December but probably in the first quarter. Wall Street had been geared up for the start of a pullback from the easing program sometime this quarter, but a more sluggish economy and fiscal uncertainty make that less likely.

"One thing we know for sure, as much as we know anything, is that short-term interest rates are going to stay low for as far as the eye can see," DoubleLine CEO and chief investment officer Jeff Grundlach said on "Squawk on the Street." "Quantitative easing is not even going away. It seems with this budget wrangling, it's going to keep going up."

"It means the credit market is really a safer place than it's been for the last few months," he said.
Since word of a compromise debt deal came Wednesday, bond yields have fallen and the dollar has tumbled, as traders worried the partisan battling would resume around the next set of deadlines for the budget in January and debt ceiling in February. The 10-year Treasury yield dipped to 2.6 percent from its Wednesday morning high of 2.76 percent, and the dollar index lost a full percent Thursday, trading at a nine-month low of 79.68.

The S&P 500 Thursday, after trading lower early in the day, broke through to a new high in the afternoon in a burst of buying. The S&P 500 (^GSPC) closed up 11 at 1,733, topping its Sept. 19 high. The Dow (^DJI), however, finished down 2 at 15,371, dragged down by losses in IBM (IBM).

"You don't have to worry about the government anymore. A couple of speed bumps are out of the way. There's no way they're going to taper this month and the odds of them tapering in December are low," said Dan Greenhaus, chief global strategist at BTIG. Greenhaus said the stock market also is being helped by other factors, including the fact it is entering a seasonally favorable time of year.

"To the extent you think more [Fed bond] purchases are better than less, and that pushes stock prices higher, then that's supportive," he said.

For weeks this summer, markets had been anticipating that the Fed would start to slowly cut back on its quantitative easing program, or the hefty $85 billion in bond purchases it makes each month.
Since the spring, Fed officials, in speeches and testimony, had commented repeatedly about the first steps of "tapering" bond purchases if the economy was strong enough. So the first shock to markets was when the Fed decided against announcing tapering in September, citing concerns about financial conditions but also fiscal headwinds.

Now those fiscal headwinds have come to bear, with economists saying the 16-day government shutdown likely took a bite out of the economy's already slow growth.

"We won't know the economic damage done by the shutdown for a while, and we have the uncertainty of what's going to happen with the budget negotiations through January now, and those are the reasons they said in the first place why they had to delay it," said Diane Swonk, chief economist at Mesirow Financial.

Swonk said the economy is showing signs of sluggishness, and it is in part because the Fed talk about winding down bond purchases sent rates higher. "We had less momentum in part because maybe the Fed 'mea culpa' and how they explained tapering. Rates backed up," she said. The 10-year hit 3 percent as traders braced for the Fed to start reducing its purchases of Treasury bonds and mortgage-backed securities.

Federal Reserve Chairman Ben Bernanke's final meeting is in January, and Swonk said it's a close call whether the Fed starts to reduce bond buying then. "I think that's something he would like to do ... January at the earliest but I wouldn't be surprised if it's March or later," she said.

JPMorgan economists say the government shutdown likely shaved a half percent off of fourth quarter GDP, resulting in growth now of 2 percent. But it should boost first quarter by 0.25 percent.

"As far as the Fed goes, we have not really changed our views all that much. While recent events have made 2014 look like the more likely time of the first tightening, we would not rule out December just yet, and think there is about a 30 percent chance the Fed moves then," wrote Michael Feroli, chief U.S. economist at JPMorgan (JPM). He noted that the Fed's decision not to cut back on bond buying in September was a close call.

Feroli said the "drop dead" date for the debt ceiling is now likely to be April or May, and the real impediment to a Fed move is the economic data. Many economic reports were unavailable during the government shutdown, and markets still await the key employment report from September, now expected Tuesday. Other data are expected to follow in the next several days.

Adrian Miller, GMP fixed income strategist, handicapped the Fed moves this way: Zero chance of tapering at the Oct. 17-18 meeting; 20 percent chance in December; 25 percent in January, and 40 percent at Yellen's first meeting as chair March 18-19.

Mohamed El-Erian, CEO and co-CIO of Pimco, said on "Squawk Box" that it makes sense the Fed will now put off tapering until Yellen takes over as Fed Chair, so the Fed may now be more accommodative for longer.

"But this notion of taper is less probable now given what has happened," El-Erian said.

Fed speakers are once again in the spotlight, now that Washington is taking a temporary back seat for markets. A trio of Fed officials participate in a Washington conference Friday on "Planning for the Orderly Resolution of a Global Systemically Important Bank." Richmond Fed President Jeffrey Lacker speaks at 8 a.m. Eastern time, Fed Gov. Daniel Tarullo speaks at noon, and New York Fed President William Dudley speaks at 3:40 p.m.

Chicago Fed President Charles Evans speaks at 2 p.m. on the economy and monetary policy at a lunch in Chicago, and Fed Gov. Jeremy Stein speaks in Washington at 4:30 p.m. at a National Bureau of Economic Research conference on addressing financial imbalances at 4:30 p.m.

Leading indicators are released at 10 a.m. and there is a crop of important earnings report before the market open, including General Electric (GE), Honeywell (HON), Morgan Stanley (MS) and Baker Hughes (BHI). Schlumberger (SLB), Kansas City Southern (KSU), Parker Hannifin (PH), SunTrust (STI) and Textron (TXT) also report.


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12 Comments

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TINKDAY

Keep piling on the debt, helps no one, but the very wealthy, all the rest of us get to pay for it, but just maybe the rest of us will finally say no more, wouldn't that be great and finally put an end to this greed and corruption that is slowly destroying this country. And these so called fines and penalties that companies like HSBC and goldman sachs get are a small fraction to the losses this country has occured do to these companies and others. Losses are in the tens of trillions of dollars and these companies get a slap on the hand, plus they are able to write these off on their taxes.

October 19 2013 at 4:07 PM Report abuse rate up rate down Reply
jdykbpl45

Thanks to Obama, Pelosi, Reid and the democrat party.

October 18 2013 at 5:11 PM Report abuse +1 rate up rate down Reply
Big John

This means all you retired folks like me will not be able to get any decent interest rates on our savings that took is many years to accumulate. I refuse to gamble with my retirement in the stock market and should not have to. Considering the GOP caused this mess and now wants to cut our social security and medicare that we paid in to for over 45 years how could anyone 65 or older vote for these liars? You are shooting yourself in the foot.

October 18 2013 at 3:35 PM Report abuse +3 rate up rate down Reply
1 reply to Big John's comment
willypfistergash

First you didn't pay into SS. you had the money taken from you...and SS will be insolvent all on it's own by 2033. The mantra from the dems is "don't touch it!", while the repubs are at least acknowledging it's trouble and saying let's start talkking abiut fixes now, instead of yet another last minute crisis to exploit politically, and end up just putting a band aid on it to schlep through the next election cycle.

October 19 2013 at 12:53 AM Report abuse +1 rate up rate down Reply
scottee

everyone be sure to "thank" congress.

October 18 2013 at 2:04 PM Report abuse rate up rate down Reply
1 reply to scottee's comment
jdykbpl45

Screw them and Barry too.

October 18 2013 at 5:11 PM Report abuse +1 rate up rate down Reply
Edmond S. Abrain

We are currently spending $3.5 trillion dollar per year. How much will we spend if the current administration controlols the House and the Senate? If you look at the budget they submitted you would see it's about $5 trillion per year. They would say that their spending is an investment and will grow our economy. The current GDP (Gross Domestic Product) is approx $16 Trillion dollars and generates about 20% of its value in TAXES to the government. For each spending increase of $1 trillion dollars the GDP would have to increase by $5 trillion dollars or 30%. Our current growth rate is less than 2%. Spending, taxes and printing money will be a part of a strategy that results in a declinning growth and an ever increasing debt. We need to change our direction.

October 18 2013 at 10:14 AM Report abuse rate up rate down Reply
1 reply to Edmond S. Abrain's comment
scottee

isn't that what the POTUS promised? Hope and CHANGE? I guess he didn't mean change direction.

October 18 2013 at 2:05 PM Report abuse rate up rate down Reply
rudykobus

This is nothing more than a stimulus program that is attempting to make our finacial picture rosey.

the truth is ? it is nothing more than more deficit spending. One day ! We will all pay !

So you Dem's keep convincing yourselves otherwise.

A new currency will come one day. When you turn in your old currency at a 20 -1 exchange rate /

reality will then set in !

We have a 100 trillion dollar debt problem !

And the can is being kicked down the road.

October 18 2013 at 10:05 AM Report abuse rate up rate down Reply
investrman

NO business can exist spending more than it is making in revenue- mathematically impossible !

How can so many of YOU go along with more credit limits for US Govt and creating even more debt SOMEONE will have to pay down, as sooner or later, it ends and the Nation goes default anyway BECAUSE so little coming in with revenues vs. those working people left out there who are forced to keep paying more taxes of all sorts to keep it running....

#1. How about tax those who are now going to lifetime Disability payments?

#2. Tax those receiving Food Stamps/ EBT for free?

#3. How about tax the MANY millions of acres of US soil owned by supposed non-profits from churches to think tank groups all exempted from taxes altogether or sales taxes for products/services they buy for those properties?

October 18 2013 at 8:20 AM Report abuse -1 rate up rate down Reply
2 replies to investrman's comment
analyst0042

Will never happen because it makes too much sense. Many people out there think that the spending can go on forever...there is always the rich to tax..the definition of rich being anyone making more than themselves. I really believe that this country will go through a recession/depression within the the next 10 yrs that will make the last one look like a walk in the park.

October 18 2013 at 8:59 AM Report abuse rate up rate down Reply
Big John

Why don't you just read about how Bill Clinton balanced the budget and left Bush a surplus and then read how Bush left Obama a huge deficit and the worst recession since the Great Depression. By the way, you will not hear or read about these truths on Fox News or anyone who works for Rupert Murdoch or Roger Ailes.

October 18 2013 at 3:44 PM Report abuse -1 rate up rate down Reply
2 replies to Big John's comment
willypfistergash

Wbh don't you read who put the balanced budget on bubba's desk? Yeah. Newt and his house balanced the budget , and all slick willy had to do was sign them and pick up chicks.

October 19 2013 at 1:02 AM Report abuse rate up rate down
willypfistergash

As soon as you can tell us what Bush signed to cause the crash, we'll all listen. You voted for the guy presiding over the worst economic rcovery since the great depression.

October 19 2013 at 1:05 AM Report abuse -1 rate up rate down