Will the FED taper taper this week?

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From BofAML discussing this week’s October FOMC meeting:

Sticking with the plan 

As worries about the global economy increase and markets wobble, the Fed is likely to stick with its current plans. Despite some talk of tapering the taper, we expect the FOMC to conclude their QE3 asset purchases at this meeting. Despite improving labor markets and general unease with “calendar-based” guidance, we expect to FOMC to retain the current statement language. We see some chance the FOMC may reintroduce language about risks from too low inflation. Rather than signaling a move toward tighter policy, the Fed is likely to maintain a risk management approach that suggests a patient and gradual path to the eventual exit.

Quite enough QE 

The October FOMC meeting is likely to see the end of QE3 buying, as the Fed tapers the final $15 bn in asset purchases. We see only a small chance that the Committee will decide to scale back the taper, despite comments from certain Fed officials. Tapering has been largely contingent on an improving labor market, and most Fed officials believe progress has continued. The FOMC also has indicated multiple times that they are likely to end QE3 in October, although they also have noted that tapering is not on a preset course. In our view, it would take a significant adverse shock to change the Fed’s plans and extend QE3.

Linguistics languish 

As for the statement language, we expect the “significant underutilization” language to once again remain in place – although we see some chance that it is modestly downgraded, say to “elevated underutilization.” Meanwhile, the likelihood of replacing the “considerable time” language is much more evenly split. Our base case remains no change in October, largely because there is no urgent need to revise, especially with the increase in downside risks to the outlook and heightened market volatility since the last meeting. However, there is general dissatisfaction on the FOMC with this phrase, and Fed officials have had another month and a half to consider alternatives. With no press conference scheduled at this meeting, the Committee may opt for re-examining the forward guidance language more comprehensively at the next meeting in December.

Divining the dissents 

The number and nature of dissents at this meeting bears watching. We see a high probability of hawkish dissents from Dallas’s Fisher and Philadelphia’s Plosser. In our view there is some chance the FOMC statement will note a bit more concern about downside risks to inflation – a reflection of recent data, the drop in breakevens, the strong US dollar, and disinflationary forces abroad. Should the Committee opt not to add such language, a dovish dissent from Minneapolis’s Kocherlakota becomes a risk. As the Fed gets closer to beginning the policy normalization process, a larger number of dissents becomes more likely for a time. We continue to recommend focusing on the statement language and prepared remarks from Chair Yellen and other key Fed officials to understand the views of the majority of voters, who favor a patient and gradual exit process.

That sounds about right to me.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.