Confused About Fed Tapering? Don't Be

Wall Street
Richard Drew/AP
By Dhara Ranasinghe

Mixed messages from the Federal Reserve about when it will taper its monetary stimulus program have sent markets into a tailspin again. But perhaps there's little reason to be confused about the Fed's message, some analysts say.

Benchmark 10-year Treasury yields hit their highest level in two months, U.S. stocks tumbled and the dollar shot higher Wednesday, while Asian stocks opened down Thursday after minutes from the October Fed meeting suggested the asset-purchase program could be unwound in coming months.

"The financial community in general overreacted to the FOMC minutes," Kathy Lien, managing director at BK Asset Management, said in a note referring to the policy-setting Federal Open Market Committee.

"The price action in equities, Treasurys and currencies suggests that there was a major shift or revelation by the Fed but in reality the minutes contained very little surprises and did not say anything that we had not all already known," she added.

The minutes came just a day after Fed chief Ben Bernanke suggested the central bank would keep its ultra-easy monetary policy in place for as long as needed, sending a conflicting message to financial markets keen to know when tapering might begin.

According to Lien,
markets were pricing in an 80 percent chance that tapering of the $85 billion-a month stimulus program could take place in January or March ahead of Wednesday's minutes and those odds remained the same afterwards.

The point here, say analysts, is that tapering is expected to occur over the next few months given a pick-up in economic conditions and the minutes or recent comments from policymakers don't change that.

"What we're getting from the Fed is a natural discussion about their core view, that's what the minutes show. They were discussing this [tapering] before so I don't see anything extraordinary here," said Tim Ridell, head of global markets research for Asia at ANZ Bank.

Other analysts pointed out that recent comments from Fed policy-makers such as Bernanke and Vice Chair Janet Yellen, nominated as the next Fed chief, provide greater insight into current Fed thinking.

Yellen, expected to take over from Bernanke early next year, last week voiced concern about the economy, sluggish job growth and low inflation rate in a confirmation hearing to a Senate panel.

"We've had comments from Bernanke and Yellen in the last few days, so that is more current than the minutes," Nizam Idris, managing director and head of strategy for fixed income and currencies at Macquarie bank told CNBC.

"Over the next few weeks the dollar should head lower because the Fed is unlikely to taper any time soon, so markets should still make hay while the sun still shines," he said.

The U.S. dollar index, which measures the dollar's value against a basket of currencies, extended its overnight gains on Thursday to 81.17, a one-week peak.

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Since none of the QE rounds have had an meaningful effect on the economy, a reduction in these flailing attempts to employ monetary policy mechanisms as a solution for the problems caused by fiscal policy mismanagement will similarly have no meaningful effect on the economy.

The only thing QE has accomplished is to create a massive increase in excess banking reserves being held at the Fed. In other words, an environment where the supply of money greatly exceeds the demand for money.

For some time now, the economy has been the tale of two competing forces. On one side is productivity enhancing technical innovation and entrepreneurship (fracking, 3D-printing, cloud computing, mobile broadband and smartphones, etc.) On the other side is the burden imposed by government goons, which has been building since 2000 under both Republican and Democrat administrations and Congresses. The combination of positives and negatives nets to roughly 2% real GDP growth. In other words, not nearly enough to produce sufficient demand for the massive supply of money being provided.

Of course, at some point these excess reserves will begin making their way through the system. Banks don't make money by paying depositors, and then earning no return on these funds by parking them at the Fed. When that happens, look for interest rates to rise appreciably, and the real bubble (the bond market) to pop.

November 21 2013 at 11:02 AM Report abuse rate up rate down Reply

Blame Obama he is responsible for this.

November 21 2013 at 9:40 AM Report abuse +1 rate up rate down Reply

the us government needs to take complete control of the fed. im outraged that a private company own the usa money and politics

November 21 2013 at 8:32 AM Report abuse rate up rate down Reply