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18 Oct 2013
Why March 2014 seen as absolute earliest to taper by the Fed?
FXstreet.com (Barcelona) - The latest rampage of selling interest towards the US Dollar is directly connected with expectations for a significant delay in the commencement of the QE exit strategy.
While much has been talked about this potential postponement, it is important to pencil when the Fed will realistically start its tapering now that the U.S. political farce can be stared from the rear mirror, at least until early next year, time when more embarrassing comedy to re-negotiate the government funding is due.
Arguments in favour of a delay in tapering
Firstly, there seems to be little evidence that the economy is picking up, if anything, a contraction is expected following the US government shutdown. According to James Saft from Reuters: "Tightening now would require some new, positive reason, or an over-riding commitment to risk management and bubble prevention", adding the obvious, that is, "the government shutdown did real damage to the economy, both directly, and more importantly indirectly as consumer confidence suffered."
Secondly, the budget impasse will be revisited in January 2014, and given the new conflicts likely to arise between both dominant political parties in the US, makes the outlook of the country's credit rating unstable for downgrade.
Thirdly, a confessed hawk like Dallas Fed President Richard Fisher even said “Kicking the can down the road for a few months will not solve the pathology of fiscal misfeasance that undermines our economy and threatens our future,” suggesting that the central bank's QE measure should remain in place for the time being. Expect support towards QE taper by other Fed members to be muted at best.
Another reason, very much connected with the first point made, is that upcoming economic releases in the U.S., given the disfunctionality for 2-weeks in the government, are likely to be weak, so hard to find a justification to support tapering.
Saft also mentions that "in the absence of really strong data, the temptation has to be to wait at least until March, which has a press conference and will be Janet Yellen's first bite at the apple."
While much has been talked about this potential postponement, it is important to pencil when the Fed will realistically start its tapering now that the U.S. political farce can be stared from the rear mirror, at least until early next year, time when more embarrassing comedy to re-negotiate the government funding is due.
Arguments in favour of a delay in tapering
Firstly, there seems to be little evidence that the economy is picking up, if anything, a contraction is expected following the US government shutdown. According to James Saft from Reuters: "Tightening now would require some new, positive reason, or an over-riding commitment to risk management and bubble prevention", adding the obvious, that is, "the government shutdown did real damage to the economy, both directly, and more importantly indirectly as consumer confidence suffered."
Secondly, the budget impasse will be revisited in January 2014, and given the new conflicts likely to arise between both dominant political parties in the US, makes the outlook of the country's credit rating unstable for downgrade.
Thirdly, a confessed hawk like Dallas Fed President Richard Fisher even said “Kicking the can down the road for a few months will not solve the pathology of fiscal misfeasance that undermines our economy and threatens our future,” suggesting that the central bank's QE measure should remain in place for the time being. Expect support towards QE taper by other Fed members to be muted at best.
Another reason, very much connected with the first point made, is that upcoming economic releases in the U.S., given the disfunctionality for 2-weeks in the government, are likely to be weak, so hard to find a justification to support tapering.
Saft also mentions that "in the absence of really strong data, the temptation has to be to wait at least until March, which has a press conference and will be Janet Yellen's first bite at the apple."