Tick Tock Goes the Taper Clock
In a move the surprised no one, the Federal Open Market Committee concluded its October meeting on Wednesday with the decision not to ease its bond-buying program. Like it said in September, the FOMC sees improving economic conditions but “decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”
During the meetings, the committee reviews the country’s financial conditions to determine if the economy is operating in a way that will accomplish long-term economic goals. The members of the committee then vote on strategies and policies for implementing its goals. This time around, Federal Reserve Bank of Kansas City President Esther George was the only dissenting voice.
The FOMC release explained that George voted against continuing bond purchases because of concerns “that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.”
Fed Governor Jeremy Stein was among those voting to continue the asset-purchasing program, but, as he explained during a speech in Frankfurt, Germany, at the end of September, he wants to see the tapering process tied to a steadfast indicator.
“I do think that at this stage of the asset purchase program, there would be a great deal of merit in trying to find a way to make the link to observable data as mechanical as possible,” Stein said, adding that his “personal preference would be to make future step-downs a completely deterministic function of a labor market indicator, such as the unemployment rate or cumulative payroll growth over some period.”
A consistent indicator has its downsides, and opponents of linking the policy to a clear-cut rule say it is unrealistic. Adam Posen, the Peterson Institute for International Economics’s president, spoke with The Wall Street Journal about Stein’s September proposal. Posen pointed to the complexities of life in saying that the Fed could not tie its hands in regards to monetary policy when there is the potential for a government shutdown or rapidly worsening economic situations.
However, making the process more mechanical could bring greater clarity to Federal Reserve programs, which the International Monetary Fund said is essential. In its October Global Financial Stability Report, the IMF warned that any policy dealing with tapering needs to be transparent in its objectives in order to avoid introducing confusion into global markets. The report said that a “clear and well-timed communication strategy by central bank officials is critical.”
The decision not to taper was expected, but that doesn’t mean it’s welcome. Investment managing firm BlackRock Inc. (NYSE: BLK) CEO Laurence D. Fink is watching the markets, and what he sees concerns him. Bloomberg provided coverage of remarks he made on Tuesday as part of a panel during an event sponsored by the Paulson Institute and the University of Chicago Institute of Politics. Of his many comments, Fink said, “We have issues of an overzealous market again.”
What is Fink’s prescription? “It’s imperative that the Fed begins to taper.”
Fink said the policy is leading to “bubble-like markets,” and his worry is not completely unfounded. Annual returns on the S&P 500 have been up as much as 25.5 percent. So far this year, more than $277 billion has been invested in stock funds, according to MarketWatch. This is the highest level since 2000, when $324 billion was invested. That year also saw the bursting of the tech bubble.
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