We didn’t expect a lot from this relatively minor Fed meeting, one that doesn’t even offer a press conference afterward. With QE taper expectations being pushed off again to at least December or January, as well as a 16-day government shutdown that resulted in a disruption in the compilation of economic data, there weren’t as many new issues to discuss (from what we can gather…not having been invited to the actual meeting chamber). The official commentary made mention of weaker growth, notably in housing, while household spending and business fixed investment did make advances. The government shutdown was blamed for part of this, as expected, and a continuing tough labor market was noted, despite ‘some’ improvement.
The underlying issues remain as they were: when tapering should begin and how much it should be, and what other forward guidance language is appropriate to precede or accompany the taper. Studies done in recent years have looked at the impact of such guidance language, and have largely shown these communications to be at least as important as the stimulus itself in steering market expectations (this isn’t a startling conclusion, since markets react on news before reality most of the time).
Economic growth has been positive but spotty, in the 1.5-2.5% range, with hopes of a bump-up towards 3% in 2014-2015. Some economists have argued that some signs of life over the past several quarters demonstrate a lessened need for stimulus (and overstimulus certainly raises the possibility of overheating on the monetary side, stoking inflation fears down the road). However, the Fed is still penned into its dual mandate—and job growth is the sticking point. By several metrics, unemployment remains at levels seen as undesirable by the government, so the gas pedal remains depressed in response. Janet Yellen has spent a good deal of time in her career as an economist studying labor markets and the effects of unemployment, so expect this focus to continue if not intensify somewhat in coming years relative to Bernanke’s focus on avoiding deflation. Unfortunately, and again a problem with the dual mandate situation, unemployment becomes as much a political problem as it does an economic one.
While current consensus continues to point to December/January as likely times for a taper announcement, there are some bearish outliers who believe lackluster economic growth may warrant a further postponement until mid-2014 at least, or even additional QE (believe it or not!). The latter scenario doesn’t seem as likely even if it were politically/monetarily palatable, but there continue to be a wide range of views on our current economic condition—ranging from a lowly status as the new Japan (low growth, deflation) on the pessimistic end, to a more bullish view of the U.S. being on the cusp of a renewed growth renaissance brought about by pent-up demand for capital goods and housing, fueled by newly discoveredand cheap shale oil/gas resources. As usual, the reality is probably somewhere in the middle.