The decision is a missed opportunity and will prolong market uncertainty.…
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Keith Wade, Chief Economist & Strategist – Schroders
The Federal Open Market Committee (FOMC) wrong-footed investors on Wednesday when it decided not to begin tapering its $85 billion-a-month asset purchase programme.
The decision represents a missed opportunity and will prolong market uncertainty, according to Keith Wade, Chief Economist & Strategist, and David Harris, Head of US Multi-Sector Fixed Income.
Keith Wade, Chief Economist and Strategist:
Clearly not enough has been done for the Federal Reserve (Fed) to believe that the gains in the labour market can be sustained. The tightening in financial conditions was a worry following the rise in Treasury and mortgage rates, although the Fed Chairman Ben Bernanke also expressed concern about the imminent budget debates, the debt-limit issue, and the possibility of a government shutdown.
The next date for the Fed to start tapering is October, although given tonight’s comments, December may be more likely.
Risk assets will enjoy the ride and bond yields have already fallen sharply along with the dollar. The ‘Bernanke’ put is back.
Bubble concerns could return but the Fed would only have itself to blame: it has missed a perfect opportunity to start moving policy toward the exit.
David Harris, Head of US Multi-Sector Fixed Income:
No one saw this coming. Everything in the run up to the FOMC strongly suggested it would begin to taper. In Bernanke’s comments he lists a variety of reasons to hold steady for now, but the most interesting one is the increase in mortgage rates – which they provoked with the taper talk.
The Fed decision to hold asset purchases constant was a surprise to markets. Clearly there is concern about the recent softer tone to economic data, part of which is from the impact of higher market borrowing costs. Downward revisions to 2013 and 2014 growth forecasts reflect the reality of ongoing tepid economic activity.
Shorter term interest rates are so far rallying much more than long rates, showing that the taper was fully priced in to long yields while the lower growth expectations should mean short term rates held near zero for longer.
Ultimately the Fed will still need to scale back purchases. Not tapering now prolongs the uncertainty, and market volatility will remain high until the Fed is able to provide more clarity about its quantitative easing exit strategy.
Stronger growth forecasts in 2015 and 2016 notwithstanding, the Fed is clearly hinting that their unemployment threshold can be breached as long as inflation and inflation expectations remain well behaved. Given their 1.6-2.0% CPI forecasts as far out as 2016, is suggests that interest rates could possibly be held near zero until that time. That will be a strong incentive for many investors to redeploy cash back into the market.
Unfortunately, the stressing of being data dependent will only lead to higher volatility in the months ahead. This policy will effectively magnify the impact of economic data for the foreseeable future.
Source: BONDWorld – Schroders
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