The big market debate is when the Fed, if at all, will taper. Taper means they will not necessarily end the QE program but decrease it. But another school of thought thinks the Fed may even increase the QE program. But here’s the strange thing, the Fed said we would be at 7% when the program unwinds, but it’s still going, and here we are at 7%.
As equities celebrate today’s better than expected jobs report (for now), apparently comfortable in the knowledge that it’s good-enough-but-not-too-good, we are reminded that just six short months ago, none other than the Fed chairman himself uttered these crucial words during his June 19th press conference:
“…when asset purchases ultimately come to an end the unemployment rate would likely be in the vicinity of 7%”
So here we are at 7.0%… and no taper in sight as excuse after excuse is rolled out for keeping the floodgates open. Whocouldanode? This appears to right up there with “subprime is contained”, “nobody really understands gold”, and “tapering is not tightening.” But still we are supposed to give great credibility to their forward guidance?
Via WSJ, [9]
The jobless rate for May, the latest data Mr. Bernanke had when he laid out that guidepost, stood at 7.6%. Then it fell much more quickly than Fed officials expected, dropping to 7.4% in July and 7.3% in August.
In September, the Fed surprised many market participants and held the quantitative-easing program steady. At his press conference after that meeting, Mr. Bernanke made no mention of the 7% guidepost he’d set out a mere three months earlier. When asked about it, he downplayed the importance.
“There is not any magic number that we are shooting for,” he said. “We’re looking for overall improvement in the labor market.
No Fed official has publicly uttered the words “mistake” when it comes to the 7% figure, which according to Mr. Bernanke had broad support among members of the Fed’s policy committee. But the about-face seemed to acknowledge the misstep all the same.
As we have noted numerous times before; the “taper” is all about economic cover for a forced move the Fed has to make because:
1. Deficits are shrinking [10] and the Fed has less and less room for its buying
2. Under the surface, various non-mainstream technicalities are breaking in the markets [11] due to the size of the Fed’s position (repo markets, bond specialness, and fail-to-delivers among them).
3. Sentiment is critical; [12] if the public starts to believe (as Kyle Bass warned) that the central bank is monetizing the government’s debt (which it clearly is), then the game accelerates away from them very quickly – and we suspect they fear we are close to that tipping point
4. The rest of the world is not happy. [13] As Canada just noted, the US monetary policy will be discussed at the G-20
Simply put, they are cornered and need to Taper; but know the ‘bad’ effect it will have… and given Bernanke’s history os forecasting, how van anyone “trust” forward guidance?
What is needed is another central bank to step up and keep the party going…
