7/27/2019 CME Feds Likely to Postpone Qe Tapering Decision Into 2014

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1 market insights

nsightsMarket

The Federal Reserves Federal Open Market Committee

(FOMC) is scheduled to meet on October 29-30, and

again on December 17-18, 2013. While market conditions

are certainly fuid and perceptions may evolve, our

current assessment is that the FOMC is not likely to make

a decision at either o the next two upcoming meetings

on when and by how much to reduce its monthly Treasury

security and mortgage-backed security purchase

programs (i.e., quantitative easing, or QE). Current

members o the FOMC are hyper-sensitive to economic

data, especially regarding US labor markets, infation, and

housing. The likely delay in making any QE exit or

tapering decision is directly related to uncertainties over

the impact on the US economy in the ourth quarter rom

the government shutdown and debt ceiling debate. Our

own view is that the events in Washington, DC, in October

2013, will possibly cost the US economy about 1% to

1.5% real GDP growth in Q4/2013.Our projections back

in the summer o 2013 were or a 2% annualized

growth rate in Q4/2013, and now we have lowered

our projection to 0.5%-1.0% real GDP growth.

Figure 1.

Data Release Delays, and then Data

Conusion

A key problem stemming rom the government shutdown

is the level o stang at the departments in charge o US

economic data collection. It is not only that the intenselywatched employment report previously scheduled or

the rst Friday o each month was delayed. The whole

data collection process during the month o October

may be impacted in ways that are dicult to determine

until ater the reports are eventually released.

For example, the establishment survey that underlies

the collection process or non-arm payrolls data is

based on the question o how many employees are

working on the 12th o the month. The data eventually

collected and processed or October will be highly

suspect and probably subject to potentially large

revisions. The household survey that underpins the

collection o the labor orce and unemployment data

may be impacted even more, with a potentially large

deterioration in the inormation quality o data.

The data release delays and then the subsequent

conusion over interpreting possibly fawed data

means the data-dependent FOMC may need to wait

or the employment report scheduled or the rst

Friday o January 2014 beore they get a dependable

read on how the US labor markets coped with the

uncertainties o the government shutdown, budget

process, and debt ceiling debate.

OCTOER 7, 2013Y LU PUTM, CIEF ECOOMIST, CME GROUP

http://www.cmegroup.com/

7/27/2019 CME Feds Likely to Postpone Qe Tapering Decision Into 2014

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OCTOER 7, 2013

ew FOMC Members Make ny

Fed Forward Guidance Suspect

I the data delays and conusion were not enough,

the membership o the FOMC is undergoing some big

changes. There may (or may not) be a new Fed Chair

taking over at the January 28-29, 2014, FOMC meeting.

Among others, regional Fed Presidents Charles Evans

(Chicago) and Esther George (Kansas City) rotate o as

voting members, and Charles Plosser (Philadelphia) and

Richard Fisher (Dallas) rotate on. As many as three

board members may leave during 2014 and eventually

be replaced.

Figure 2.

The implications o how a newly constructed FOMC

might decide uture policy should not be under-

estimated, especially the potential or exiting QE

aster and considering raising the target ederal

unds rate sooner than current Fed orward guidance

appears to suggest. The current $85 billion per month

QE asset buying program represents annual asset

purchases greater than 6% o GDP and some one-third

larger than the ederal budget decit or FY2013. Such a

massive asset buying program was never intended to be

permanent. With the Feds balance sheet now exceeding

20% o the nations GDP, the newly constituted FOMC

may well eel some internal ears about the serious

negative unintended consequences o maintaining such a

huge QE program, regardless o the state o the economy.

Figure 3.

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