In typical economist fashion I am both not surprised and surprised (in that order) by the FOMCs decision this morning to leave its asset purchases program unchanged at $85 billion per month. As you know our read of recent US data suggested the case for a tapering announcement from the Fed today was no better than 50:50. However, having started the monetary policy “normalisation” process, pragmatism suggested they would start a gradual taper process.
While the Committee believes downside risks
to the economy have diminished, the pace of economic expansion is clearly still
not sufficient for them to start to reduce the pace of additional
stimulus. The labour market remains a
key concern given the continued decline in the labour force participation
rate. They are also concerned by the
interest rate increases that had already occurred and the impact that was
having on the economy. As we expected,
the Fed lowered their economic growth forecasts today.
Furthermore they are also concerned about
the upcoming fiscal debates, although that’s not new news. Given the lack of a comprehensive US fiscal
strategy, political noise appears likely to be a feature of the US fiscal
landscape for some time to come. That
said, the US fiscal deficit is on a steeply improving path which you’d think
would make the next round of negotiations easier and smoother than previously.
The immediate impact of today’s decision is
as you’d expect: risk on. Where markets
go from here will depend on the flow of data.
While we expect September quarter GDP will be a tad softer than the June
quarter, we expect activity will be stronger in the fourth quarter, although
still likely below a sub-3% annual pace.
That means that data will be little changed by the time of the October
FOMC meeting, but picking up into the meeting scheduled for December 17-18.
Finally, I can’t help feeling today is a
bit of a lost opportunity. The markets
were getting used to the idea of tapering and were prepared for it. December now seems the most likely time to
start, or at least announce, the tapering process. In the meantime it’s back to data watching.