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Fed’s Economic Stimulus Tapering : (Commentary)

bernanke-18dec2013-2 - federal stimulus tapering

 

If Ben Bernanke had aimed to leave his position as Federal Reserve Chairman with a bang, it is quite possible that he may have succeeded in doing so through economic stimulus tapering.

Yesterday, the Federal Reserve announced a plan to cut its monthly asset purchases by $10 billion dollars to a total of $75 billion dollars per month.  5 billion dollars will be taken from mortgage bond purchases while the other half will be taken from Treasury purchases.

At the same time, the Federal Reserve announced plans to keep short-term interest rates near 0% well after the period that the unemployment rate had reached Ben Bernanke’s stated benchmark of 6.5%.  This strategy is also based on stated concerns by the Fed that the inflation rate may stay below 2%.

Markets responded happily to the news.  The Dow increased by over 290 points to close at a record-high of 16167.97.  The S&P 500 Index rose by nearly 30 points to close at a record-high of 1810.65.

Coming off the heels of a strong November jobs report, the Federal Reserve determined that “cumulative progress” was made in the U.S economic recovery and that it was enough to prove a slight tapering of QE.

The November jobs report seemed to be the potential game-changer that brought the issue of tapering back into focus for the Fed.   Another catalyst for the Fed’s decision today was the stronger-than expected retail sales that occurred in November.

federal reserve system logo - same piece

 

Today’s action by the Federal Reserve could be analogous to a proposed (and now doomed) attempt at a soda ban by NYC mayor Michael Bloomberg.

Mayor Michael Bloomberg attempted (unsuccessfully) to ban large and super-sized sugary drinks at public venues such as restaurants and bars.   Besides that it was unconstitutional, the ban did not stop people from purchasing fruit juices and milkshakes that were just as unhealthy.

So far, the main aspect of the Federal Reserve’s decision today is the significant reduction of any market uncertainty with regards to quantitative easing going forward.   Regardless of my opinion on this matter, the Federal Reserve’s plan was clearly communicated and a clear strategy was put in place.

Yet, I cannot help but feel that the tapering decision made by Bernanke is premature.  While Ben Bernanke touted the overall economy’s progress in his decision, the Federal Reserve’s decision to keep interest rates near zero way past the 6.5% unemployment rate benchmark indirectly suggests that they still feel that the overall economy is quite vulnerable.

In a recent Seeking Alpha piece, I’ve indicated that the unemployment rate’s decline to its current level of 7.0% was mainly due to individuals dropping out of the labor force.   Furthermore, November marked the 43rd consecutive month that the amount of people that found jobs was surpassed by the number of people who dropped out of the labor force.

Given the low employment-to-population ratio and the meager quality of jobs that were regained, the labor market is not as healthy as the 7.0% unemployment rate would suggest.

The Federal Reserve should have waited for another above-average jobs report and/or retail sales report in December. Then they could have commenced tapering in early 2014.   This would have provided more than enough evidence of a sustained recovery in the labor market.   The Federal Reserve may have been emboldened to cut its asset purchases by more than 10 billion dollars.

As things now stand, there is still enough reason for analysts and insiders alike to cast a reasonable doubt about the labor market.   One would only hope that the December jobs report isn’t anywhere near mediocre.  If so, this could throw a monkey wrench in the Federal Reserve’s moderate tapering plans for 2014.

The Federal Reserve’s action on Wednesday will work wonders for quelling uncertainty in the marketplace regarding the taper.

Yet, I’ll wait for a good jobs report and retail sales report in December before I lend my full endorsement to the Fed’s tapering decision today.

Andre Waldron

Andre Waldron is the founder of Market Eyewitness. He provides financial analysis and commentary on equities, economic indicators, industries and mutual funds. In addition, Andre Waldron is also a contributor to Seeking Alpha as well as The Street.

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