Why The Fed Won’t Taper In December

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Summary

  • To gauge the likelihood of a December taper, we should think through the changes that might occur in the first paragraph of the FOMC’s statement, which is always a brief assessment of the state of the economy.
  • While the committee will surely tweak its language on account of last week’s strong jobs data, we’ll see downgrades in other parts of its assessment, which should include a reference to weaker business investment growth and possibly a renewed warning about rising mortgage rates.
  • The committee should also be concerned about holiday spending after seeing rapid inventory accumulation in Q3 GDP and other indicators.
  • Inventory and spending concerns may not be recognized in the statement, but they’ll add to the case to let the dust settle on the fourth quarter before changing existing policies.
  • We expect the tapering decision to be deferred to the next meeting once again.

    • Thinking like the Fed

    To know your enemy, you must become your enemy -Sun Tzu

    In war, poker, chess and many other endeavors, wise old hands will advise you to think like your opponent. We’ll try a related idea here by seeing if we can think like the members of the Federal Open Market Committee (FOMC). Specifically, we’ll pretend to write part of the statement for the FOMC’s December 17/18 meeting.

    We’ll work through the four or five sentences in the statement’s first paragraph that sum up the committee’s thoughts on recent developments. When the FOMC makes a policy change, it’s always linked to these four or five sentences. Here’s what they said in the last statement (for the meeting on October 29/30):

    Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated. Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.

    As you may know, there are at least five pieces to this section: employment, household spending, business investment, housing and inflation. In addition, sometimes factors outside the big five become important enough to make a special appearance. For example, every one of the last six statements included a sentence on fiscal restraint.

    We’ll look at each area in up to four steps: old language, new information, comparison and new language. Here are the questions we’re trying to answer:

  • Old language: What did the last two statements say? (We’re including the September 18-19 statement because of the surprising decision not to “taper” the Fed’s monthly security purchases and the fact that it was described as a “close call.”)
  • New information: What have we learned since the September non-taper?
  • Comparison: In view of the new information, how does today’s economy compare to the September 18-19 economy?
  • New language: What will December’s statement say?

Once we’ve covered each area, beginning with employment below, we’ll explain why our answers tell us to expect another non-taper.

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