Courtesy of Calculated Risk, here are some taper previews. From Merrill Lynch:
Once again, market anticipation is rising ahead of a Fed meeting. In our view, this meeting will be defined by what the Fed doesn’t do: we see a low chance of the start to tapering or meaningful changes to forward guidance. Rather, we look to Chairman Bernanke’s final press conference for a broad discussion of Fed policy options into next year. He is likely to signal both that tapering could start early next year — conditional on the data — and that the Fed will be patient and gradual as it winds down its purchase program. We also expect him to indicate that the Fed will strengthen its forward guidance if needed, but keep his options open. The overall tone should be modestly dovish, especially relative to market expectations of potential start to tapering. We expect him to reiterate that the Fed intends to keep policy accommodative well into the future in order to support a broader and more sustained recovery.
And from Goldman Sachs:
Fed officials face a more difficult decision at their meeting next week, as the employment and growth data have picked up since the October meeting. But our central forecast for the first tapering move remains March, with January possible as well. We see a decision to taper next week as unlikely for three reasons.
First, the case for tapering on the basis of the data since October is mixed at best. The strongest argument in favor is the improvement in the trend rate of payroll growth to the 200k level. However, we expect that Fed officials will also put considerable weight on inflation, which has fallen further in recent months. At current spot and projected inflation rates, a tightening move would be quite unusual by historical standards.
Second, we continue to expect that tapering will be offset by a strengthening of the forward guidance, but we doubt the FOMC is ready to take this step. While some eventual strengthening or clarifying of the forward guidance is now a consensus expectation, the October minutes and recent Fed commentary suggest little agreement on what form this should take.
Third, while consensus expectations now place greater probability on a December taper, it remains a minority view. We suspect that this makes a move less likely, as Fed officials will be reluctant to deliver a hawkish surprise that could tighten financial conditions and raise doubts about their commitment to the inflation target.
Calculated Risk‘s own view is more hawkish:
My view is the data is broadly consistent with the FOMC’s projections in June and September. Inflation is too low, but the FOMC was projecting low inflation – and they are expecting inflation to pick up in 2014. Most analysts expect the FOMC to wait until 2014, but a small taper this week should not be a surprise.
If the Fed does reduce their asset purchases, the “taper” will probably be small – perhaps to $75 or $80 billion per month from the current $85 billion per month. If purchases are reduced, it seems likely that the Fed will continue to purchase agency mortgage-backed securities at the current rate ($40 billion per month), but reduce their purchases of longer-term Treasury securities from $45 billion per month.
…In September I wrote “It does seem odd that the FOMC would start reducing asset purchases while downgrading GDP, and also expressing concern about the downside risks from fiscal policy”. In some ways the reverse is true now. GDP and unemployment will meet or exceed the FOMC’s September projections, and core inflation will be close. And fiscal policies appear resolved for 2014. Clearly the data is broadly consistent with the September FOMC projections, so a small taper should not be a surprise (even if most analysts think the FOMC will wait until early 2014).
My view is that the Fed will wait until January or March for three reasons:
- shutdown distortions are still washing through economic data;
- long bond rates are poised to jump to new highs which the economy is not strong enough to handle. The Fed is clearly aiming to anchor them using forward guidance and more time spent on that would be useful, and
- inflation is low because oil (and other commodities) are falling, especially in the US, and is probably going down further.
We shall see!
