Taper Or No Taper - What The FOMC Has Really Said

Economic history is pockmarked with policies instigated with the full intention of improving economic performance which have eventually turned out to do real damage. From the Napoleonic Wars to Weimar and up to the present day gold standards and Keynesianism, Deutsche's Jim Reid notes all too often economic institutions allow themselves to be stuck in intellectual cul-de-sacs at their peril. Such a risk appears alive and well today in the halls of the Federal Reserve. The outlook for tapering is mired in a continuing war between an institutional framework which sees QE as an emergency measure that has gone on far longer then was desired and an economy whose self-sustaining momentum is far from secure. The following statements from the FOMC members shows the tight-rope of uncertainty they are treading...

What The FOMC members have said about Taper...

The FOMC came very close to tapering at the September 2013 meeting. It seems likely that if (a) Congress hadn’t been on the brink of another bout of fiscal-political grandstanding and (b) markets (especially rates) hadn’t reacted quite so strongly to the comments Bernanke made in May/June earlier in the year then the Fed would have started tapering at the meeting, irrespective of the failure of the US economy to press on in the middle of 2013.

The FOMC will be slightly more hawkish in 2014 - and even more so if Stan Fischer is added...

So how biased will the Fed committee in 2014 continue to be against QE? One way to try and take a view on this is to see the relative balance of power of FOMC doves and hawks in 2014, with an eye to their 2013 predecessors

In conclusion, Deutsche believes there is a chance that the Fed’s institutional biases lead it to taper earlier then the economic data might suggest is optimal. Whilst Yellen may be able to push against some of these biases, 2014 will still see a tightrope balancing act at the Fed as economics and institution bias battle it out and increasing noise is made for forward guidance to replace QE as the main tool of monetary policy activism.