In “Why the Fed Won’t Taper in December,” we pretended to write the first paragraph of the Federal Open Market Committee’s (FOMC) statement for next week’s meeting. By thinking about the likely mix of upgrades and downgrades to its assessment of the economy, which is the crux of that paragraph, we argued that we can find clues to policy decisions. Our results tell us to expect a deferral of the committee’s tentative plans to taper its securities purchase program.
You may suggest, though, that economic data doesn’t always tell you what the FOMC will do. Because we agree, we’ve also taken a different approach: listening to Fedspeak and working through the math on the committee’s consensus view. This, too, leads us to think there won’t be a taper this month. Here’s our math, starting with the biggest QE supporters and ending with Chairman Bernanke:
4 staunch QE cheerleaders
- Janet Yellen (Governor)
- Bill Dudley (New York)
- Eric Rosengren (Boston)
- Narayana Kocherlakota (Minneapolis)
These four have consistently (or since a dramatic change of thinking in Kocherlakota’s case) advocated the benefits of QE and downplayed the risks. There’s little indication that any of them wants to taper until we have a strong, broad recovery.
5 QE hawks who wanted a taper in September
- Esther George (Kansas City)
- Richard Fisher (Dallas)
- Charles Plosser (Philadelphia)
- Jeffrey Lacker (Richmond)
- Sandra Pianalto (Cleveland)
George is the only 2013 voter in this group and cast a dissenting vote in September, as she has all year long. Pianalto hasn’t been as hawkish as the others, but made it known in September that she favored a taper. Fisher and Plosser also discussed their disagreement with the decision not to taper, while Lacker voted against QE3 in 2012 and says he would have tapered “awhile ago.”
All five will surely argue for tapering and may bang their fists clear through the table this time, judging by Fisher’s impassioned speech yesterday. But that’s not enough to change the outcome; this group is no more influential today than it was in September.
2 QE centrists who tell us it’s on the table
- James Bullard (St. Louis)
- Dennis Lockhart (Atlanta)
While Bullard and Lockhart supported September’s non-taper, both have speculated about a December taper recently and helped lift expectations that this might be the month. But does that mean they’ll move off the center and play for the hawks? We don’t think so.
Bullard is intently focused on the FOMC’s 2% inflation target and registered his first official dissent in June because he wanted more of a commitment to battle this year’s disinflation. In September, he went so far as to say he wouldn’t support a taper until seeing inflation head back towards the target. He later dropped this condition. Yesterday, he mapped out his final pre-meeting thinking, saying that the FOMC could conceivably begin in December and then “pause tapering” if inflation didn’t pick up.
If you’re anything like us, you’re shaking your head at Bullard’s latest and wondering where this goes next – do we then get a threshold to establish forward guidance for the pause on the taper? (Remember, we’re talking about a change from 85 to maybe 70 or 75 billion dollars a month on a program that’s into its third trillion; it’s hard not to be cynical.) In any case, we’re guessing the taper/pause taper scenario doesn’t have enough oomph to set the committee on a new course. What it does, though, is tell us that Bullard’s willing to follow Bernanke in either direction.
Lockhart also recently tweaked his stance, but marginally. His confidence has grown to the point that he’s “pretty confident” we’ve achieved a sustainable recovery. By our count, though, each of his hints that we no longer need as much QE are typically matched by about two caveats. He stresses uncertainties and recently downplayed the information in both November’s strong jobs report and the inventory-distorted Q3 GDP report.
What’s more, one of his conditions for a taper is to be “quite confident” that the economy’s on the right track. We didn’t check a dictionary for this, but we think that “quite confident” lies a few conviction units beyond “pretty confident.” Overall, Lockhart sounds like someone who, like Bullard, wants to retain flexibility.
5 QE centrists and doves who supported September’s non-taper
- Daniel Tarullo (Governor)
- Jeremy Stein (Governor)
- Jerome Powell (Governor)
- Charles Evans (Chicago)
- John Williams (San Francisco)
Although Evans and Williams are known as doves, both endorsed Bernanke’s June message about the case for a late 2013 tapering, while Evans even said he was willing to “be persuaded” to taper in September. Stein and Powell were both “comfortable” with a September taper. But Evans, Stein and Powell all voted for the non-taper, as did Tarullo. Williams didn’t have a vote but supported the decision.
Like Bullard and Lockhart, this group is unlikely to produce a new QE hawk. Evans says he’s “open-minded” but prefers to wait. Williams needs to be “completely confident” of the economy’s track, which we’re thinking might equal the sum of “pretty confident” and “quite confident.” Powell conditions the taper on strengthening demand, and we’ve seen just the opposite in reports such as last week’s GDP release.
Stein is likely to remain “comfortable” with an immediate taper and probably prefers to see this happen. He may be the biggest wild card of the bunch. Up until now, though, he’s been more focused on process and communication than which month the taper begins, which he argues isn’t especially important. Without evidence to suggest a change in thinking, we have to conclude he’s an unlikely character to push the decision in either direction.
Tarullo is the quietest of the Governors when it comes to monetary policy, due to his bigger role leading the Fed’s bank supervision and regulatory efforts. That said, he’s a firm QE believer with a dovish record and stresses the data dependency of a taper.
1 lame duck chairman
- Ben Bernanke
The bottom line is that no-one seems to have jumped with both feet from September’s non-taper camp to December’s taper camp, suggesting that Bernanke won’t be forced into a move. On the other hand, the majority of the committee would line up behind him if he genuinely wanted to taper. The five QE hawks and Stein wouldn’t need convincing, and at least four others (Bullard, Lockhart, Powell and Evans) seem willing to defer to the chairman.
In other words, it really comes down to Bernanke. In June, he announced there would probably be a tapering later this year. December is his last chance to make good on that prediction. We doubt he will, though, for several reasons.
First, Bernanke never attaches much importance to QE’s risks and side effects. His argument that QE is relatively harmless might make you wonder why he wants to wind it down. He may have fully expected the economy to strengthen more than it has and predicted the taper on that basis. Alternatively, he may have been trying to hold the committee together by moving slightly toward the hawks and against his own biases. There are other possible reasons as well, such as concerns about collateral shortages. But whether Bernanke’s motives were economic, political, technical, or all of the above, words and actions are two completely different things. You might think of that June prediction as being similar to the New Year’s resolutions you’ll soon be making. They’ll sound great on January 1, but six months later? Not so much.
Second, other board members have already backed off the warning to expect a tapering this year. Take Evans and Williams, for example. Their recent comments suggest they’re not yet ready, and they certainly don’t feel locked in by earlier statements. With these ideological allies having already abandoned their resolutions, it’s easier for Bernanke to follow suit.
Finally, there’s another 2014 consideration that’s more than just a resolution: the fact that Bernanke won’t be part of the next meeting while Yellen takes the chair. It would be bad manners to begin the taper without Yellen being fully on board, but she just doesn’t seem interested. Recall that her nomination came through just one week before September’s non-taper. If you’re trying to make sense of this year’s mixed messages, the pending leadership change may be the best explanation of all.