Market participants have been working overtime to refine their expectations of what the Federal Open Market Committee (FOMC) might do at its meeting next week. Many are calling for a cut in the Feds pace of asset purchases from the current level of $85 billion per month.
Developments in the labor market are at the center of the Feds current monetary policy. Forward guidance has been framed in terms of thresholds of future unemployment rates that would trigger changes of course. Chairman Bernanke noted that a jobless rate of roughly 7.0% could prompt the end of the Feds asset purchase program, and a 6.5% unemployment rate would initiate deliberations about raising the federal funds rate.
Incoming economic data in the United States have been mixed, with plenty of evidence to support either a continuation of current policy or a tapering of asset purchases. Here are both sides of the argument, so you can take a stance.
In our view, incoming data do not offer evidence strong enough to support expectations that the Fed will commence tapering of asset purchases on September 18. The risk environment has become more worrisome since the last FOMC meeting in July. It should also be noted that the sharp increase in long-term rates has already tightened credit to a noticeable degree in the mortgage markets.
There are those who say that working the quantitative easing program down is going to be a protracted process, one which the Fed should begin with a small step. Failing to do so, this camp suggests, would expose markets to further uncertainty. But the market is already looking far down the road to the evolution of monetary policy in the coming years, and it is not clear that a token reduction in asset purchases will add much clarity to the outlook.
While well all be intently focused on the FOMCs headline decision, the Fed also will release new economic projections at the conclusion of next weeks meeting. These deserve some close attention for clues on how the members see the growth and employment picture evolving over the coming three years. Well have a recap of the central bank decision after it comes out next Wednesday.