The Fed, as it seems, isn’t as ready to taper as the market thought it would be. Even though Ben Bernanke said that the central bank could start reducing its asset purchases in 2013 and possibly even end them next year, the FOMC meeting minutes revealed that many policymakers actually wanted to see improvements in the labor market before making a move.
Moreover, there were even a few members who would prefer asset purchases extending well into 2014. By itself, it isn’t really a big deal, but if you compare it to the Fed’s statement a few weeks ago, there is a stark difference.
For one thing, tapering is NOT a sure thing. As I mentioned above, the minutes clearly showed that policymakers first want to see signs of advances in the labor market before they start scaling back on the $85 billion monthly bond purchases. In addition, Bernanke indicated that other economic forecasts must also be hit, like the economy growing at least 2.3% to 2.6% this year and 3% to 3.5% in 2014.
The central bank is also worried about the slow pace of inflation. If stimulus measures were to be reduced too early, the U.S. economy could fall into a deflationary spiral. Keep in mind that Fed also has an inflation mandate, meaning that it is trying to keep inflation with a certain target range. It doesn’t want inflation to go too high, but it also does not want it to go too low.
In any case, the markets took the minutes as somewhat dovish and less indicative that the Fed would be tapering bond purchases any time soon. As a result, we saw the dollar sink across the charts:
The question is, what can we expect from the Fed moving forward?
Keep in mind that the central bank met BEFORE last week’s NFP figures. Not only did the 195,000 exceed the 163,000 forecast, but the previous month’s jobs figure was revised up to 195,000 as well. Furthermore, this marked the third consecutive month of at least 150,000 net jobs added!
Yes, I have mentioned that there were other signs of weakness in the labor market, but hopefully this is a sign of more positive months ahead of us.
Considering that probably half of the 19 Fed members want to continue buying up bonds well into 2014, while the other half want to actually end bond purchases by December this year, I think it’s likely we’ll see a compromise down the middle.
What this means is that we can still probably expect tapering to begin sometime over the next three months, with purchasing ending sometime in 2014. This seems like a fair compromise so that the Fed can help support the economy while lowering the inherent risks involved.
As for the dollar, I think we may have seen profit taking take place yesterday, but that doesn’t mean that it’s the end of the line for dollar buying this summer. Just be sure to keep tabs on economic data, more specifically the labor market and the inflation rate, to help you gauge which way the Fed officials are leaning!