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Jared Bernstein

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Good for Them! Fed Delays the Taper

Posted: 09/18/2013 4:44 pm

Well, how about that? The Fed just surprised everyone and decided to hold off on the taper for now. I suspected they might, given the set of factors I mentioned this AM. From their statement-very much a "yes...but" kind of thing:

Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth. ...inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

...The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.

...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.

[my bold]

Equities, which had a least partially priced in the Fed pulling back a bit, spiked on the news. Bond yields fell as the Fed's unexpectedly going to keep buying Treasuries and agency MBS at the same pace for a bit longer.

And those of us who viewed this as not a good time to start the taper are relieved. It won't make a huge difference, of course, but given how extremely elastic the market, and especially longer-term interest rates, have been to any suggestion of the Fed pulling back, they made the right move. In other words, not tapering yet won't make things much better more quickly, but they'll keep them from getting worse.

This post originally appeared at Jared Bernstein's On The Economy blog.

 

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