FOMC Preview

September 18, 2013

Federal Reserve policymakers have preparing markets to expect a reduction this month in the size of the central bank’s monthly $85 billion of long-term asset purchases, also known as quantitative stimulus (QE).  Chairman Bernanke initially floated the idea, contingent upon continuing improvement in the U.S. economy.  Although markets at first thought the monthly quota might drop to $65 billion, analysts have scaled that expected incremental reduction in half, and whisper numbers in the marketplace put such as low as just $5 billion.  Some think postponement of tapering altogether remains a possibility, albeit a relatively small one because officials seem motivated by the view that QE is yielding diminishing benefits and mounting worry that it is promoting excessive risk taking by financial institutions.

At the last meeting at end-July, a faction of the FOMC felt that the start of tapering ought to occur soon, and the concept of tapering enjoyed broad acceptance.  Nonetheless, a policy that is to be data-driven did not get the green light to change then, and data continue to be mixed.  Unemployment has declined not because of faster job creation but rather due to a 35-year low of 63.2% in the labor participation rate.  Non-farm payroll employment grew 142K per month in June-August, down from gains of 179K per month in March-May and 233K per month in December-February.  There is some concern about the impact of rising long-term interest rates on interest-sensitive sectors.  The ten-year Treasury yield of 2.86% is 124 basis points higher than when the Fed met in May.  And in the same span, WTI crude oil prices have risen 17%.  A separate concern, the significantly negative impact that the mere prospect of tapering has had on the growth outlook in emerging markets, is unlikely to affect the FOMC’s decision.  And a wild card in the group dynamics of this month’s FOMC meeting is the upcoming end of Chairman Bernanke’s second term.  Not only will he be leaving the Board soon, unless President Obama chooses to reappoint him, but several other vacancies on the committee will also need to get filled.

The table below compares current vital market signs with those prevailing at the time of previous FOMC meetings.

  EUR/$ $/JPY 10Y, % DJIA Oil, $
06/30/04 1.2173 109.44 4.63 10396 37.95
06/30/05 1.2090 110.89 3.96 10370 57.00
06/29/06 1.2527 116.07 5.20 11077 73.41
06/28/07 1.3452 123.17 5.10 13456 69.82
08/07/07 1.3749 118.55 4.73 13510 72.27
09/18/07 1.3888 115.75 4.51 13475 81.42
10/31/07 1.4458 115.28 4.42 13873 93.59
12/11/07 1.4682 111.49 4.11 13645 89.78
01/30/08 1.4792 107.31 3.70 12454 91.70
03/18/08 1.5786 98.73 3.41 12257 107.53
04/30/08 1.5562 104.58 3.83 12953 111.54
06/25/08 1.5568 108.37 4.18 11837 133.62
08/05/08 1.5445 108.42 3.97 11484 119.82
09/16/08 1.4144 105.16 3.36 10936 91.18
10/08/08 1.3625 99.87 3.50 9447 87.02
10/29/08 1.2933 97.15 3.81 9145 67.38
12/16/08 1.3790 90.14 2.52 8687 44.14
01/28/09 1.3253 90.01 2.61 8356 42.92
03/18/09 1.3115 98.13 2.94 7340 47.73
04/29/09 1.3331 97.06 3.02 8194 51.05
06/24/09 1.3984 95.43 3.59 8373 68.76
08/12/09 1.4221 96.17 3.71 9366 70.64
09/23/09 1.4779 91.50 3.50 9859 69.13
11/04/09 1.4884 90.75 3.51 9896 80.66
12/16/09 1.4542 89.78 3.56 10478 73.14
01/27/10 1.4045 89.49 3.61 10148 73.31
03/16/10 1.3756 90.64 3.67 10645 81.45
04/28/10 1.3157 94.10 3.75 11043 82.57
06/23/10 1.2284 90.12 3.13 10307 76.50
08/10/10 1.3107 85.85 2.81 10605 79.94
09/21/10 1.3132 85.21 2.66 10747 73.05
11/03/10 1.4059 81.35 2.53 11174 84.59
12/14/10 1.3423 83.37 3.38 11497 88.47
01/26/11 1.3658 82.55 3.41 12001 87.36
03/15/11 1.3969 81.04 3.29 11815 98.09
04/27/11 1.4665 82.63 3.36 12612 112.48
06/22/11 1.4392 80.12 2.97 12175 94.87
08/09/11 1.4234 77.09 2.36 10993 81.76
09/21/11 1.3778 76.34 1.93 11377 86.74
11/02/11 1.3724 78.11 2.03 11805 92.77
12/13/11 1.3067 77.92 1.98 12130 100.20
01/25/12 1.3027 77.96 1.97 12670 98.85
03/13/12 1.3096 82.76 2.08 13044 106.34
04/25/12 1.3226 81.37 1.97 13096 104.13
06/20/12 1.2693 79.28 1.66 12837 83.63
08/01/12 1.2300 78.10 1.49 13028 88.98
09/13/12 1.2895 77.43 1.72 13342 97.60
10/24/12 1.2948 79.75 1.77 13115 85.72
12/12/12 1.3082 83.24 1.70 13325 87.13
01/30/13 1.3584 91.16 2.02 13949 97.63
03/20/13 1.2948 95.65 1.94 14497 92.82
05/01/13 1.3195 97.48 1.62 14740 90.47
06/19/13 1.3364 95.76 2.23 15304 98.38
07/31/13 1.3301 97.92 2.67 15565 105.63
09/18/13 1.3344 98.93 2.86 15515 105.98

C0pyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

Tags:

ShareThis

This entry was posted on Wednesday, September 18th, 2013 at 8:34 am and is filed under Central Bank Watch. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

Comments are closed.

css.php