Did Congress and the strong likelihood of a government shut down after September 30 lead the Federal Reserve to decide to postpone any taper?
That’s my initial conclusion after reading the press release from the Federal Reserve’s Open Market Committee and watching Fed chairman Ben Bernanke’s press conference today. Looking for any explanation for why the Fed kept its program of buying $85 billion in Treasuries and mortgage-backed securities intact, it’s language that points toward fiscal tightening that pops out at me.
First, in the Fed’s press release. Oh, there are a few tweaks to past statements. For example, the line “Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated” added “some” to the committee’s last press release.
But if you’re looking for major changes—you know like a sentence or two—the only one I see is this addition: “Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.” In other words, the Fed decided not to cut its stimulus to the economy in the face of the possibility that Congress won’t pass a budget before September 30 and that all authority for discretionary spending will cease as of that date, and the fact that proposals for continuing resolutions floating around House committees all assume that the spending cuts in the sequester will set the new baseline for lower continuing spending.
Second, in Bernanke’s press conference, the Fed chairman noted that prior comments on the economy pointed toward a potential taper, but that the Federal Reserve did not have the confirmation for sustained economic growth that would have made it confident in pushing ahead with a taper of asset purchases. The economic outlook at the Fed, Bernanke continued, was much the same as those at the central bank in June, but the Fed didn’t feel it had the confirmation it needed to begin a taper. In other words, something, perhaps something recent, made the Fed reluctant to move. (The last thing the Fed wants to do is taper asset purchases and then see the economy weaken so it has to resume those purchases. Talk about whipsawing a market.)
It’s always tough to parse press releases and press conferences from the Fed and I’m clearly arguing from very small bits of evidence.
But if I’m right, the irony of today’s post-Fed move to a new all-time record on the Standard & Poor’s 500 is worth savoring. In this view the stock and bond market are rallying because the Federal Reserve is afraid that Congress could really muck up the U.S. economy in the next few weeks (or days.
Think about that as Treasuries rally, interest rate sensitive stocks move up, and the dollar falls.
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