Forget tapering for quite a while

October 30, 2013 FOMC Decision

In a Nutshell: "...the Committee ... will continue its purchases of Treasury and agency mortgage-backed securities ... until the outlook for the labor market has improved substantially ..."

Rate Decision: Fed funds rate maintained at a range between 0% and 0.25%

Quantitative Easing Decision: Bond purchases remain at $85 billion

You can forget tapering for quite a while. The FOMC met and made it clear that throttling back on its aggressive quantitative easing program is not going to happen anytime soon. First, the Fed members pointed out to those who may have been sleeping that the economy continues to face major fiscal policy headwinds. As they noted: "Fiscal policy is restraining economic growth". But it wasn't just the government that is throwing a wrench into the normalization of monetary policy gears. The statement also points to the reality that the "recovery in the housing sector slowed somewhat in recent months". Talk is not cheap when it comes from the Fed Chairman and Mr. Bernanke's comments about tapering last spring did lead to a sharp rise in mortgage rates. Also, there remains the concern about inflation, or the lack thereof. As I noted in my commentary this morning, inflation is running below desired levels. That basic fact did not get by most (not all) the Fed members. (Esther George of the Kansas City Fed is still worried about inflation ultimately being an issue.) So we have restrictive fiscal policy, a slowing housing market and inflation below its desired pace. Is there any reason for the Fed to cut back on its stimulus policy? Not at all.

Looking forward, not only does job growth have to pick up and the unemployment rate fall, but the recent deceleration in inflation has to be stemmed if not turned around before tapering can begin. And, as the members made clear, it needs to know that the "progress will be sustained". So, the Fed will "watch and wait" and that likely means that the beginning of the end of QE is well into the future. March of next year looks like a potential start date right now. That makes total sense, especially with the prospect that restrictive fiscal policy will continue. There is no such thing as a free spending cut, no matter what form it takes, and now we are beginning to learn how expensive it can be.