Investors have become a bit nervous after a poor January and a rough start to January. Stocks have gone south, and bond yields have come back down from a peak of 3% on the 10-year Treasury and almost 4% on the 30-year Treasury. If the federal reserve was getting out of the quantitative easing and bond buying program, weren’t rates supposed to rise? Now we have a clue on how much more tapering to expect — lots!
Two different Federal Reserve presidents were talking about the timing for an end to the tapering.
The Federal Reserve Bank of Philadelphia president Charles Plosser is signaling that the bond buying program could end around the middle of 2014. This is sooner than expected, as many market pundits expect the winding down to be completed at the end of 2014. The caveat is that the tapering should be a total exit IF the global markets do not keep tanking the U.S. markets.
Plosser voted in favor of a $10 billion additional tapering in monthly bond buying by the Fed. On Wednesday he said he would have actually preferred an even more aggressive tapering amount than another $10 billion.
The caveat is assuming the economic path goes according to his expectations. Reportedly, this slow tapering was called being similar to a water torture. As long as the economics warrant it, Plosser suggests that more of his Fed members will be willing to do more tapering.
Plosser is currently expecting GDP growth of 3% and roughly 6.2% unemployment by the end of 2014. Another issue he sees is what happens if the fed is still buying Treasury notes and mortgage-backed securities when unemployment hits that 6.5% threshold.
Atlanta Fed president Dennis Lockhart gave a different tune today. He said that the $10 billion in tapering per month is basically a default mode. Until , or if, something changes handily, that is likely to be expected to remain in place. Lockhart also said that the stock market may have gotten ahead of itself and he believes that forward guidance will need to be revised.
Lockhart’s economic outlook is that 2014 will be stronger than 2013. He did warn that the upcoming data could be weaker, and suggested that weather is a key culprit for that. He also believes that inflation will hit 2% by 2015. Lockhart’s message is that tapering and bond buying will end by the fourth quarter, although short-term rates are likely in place well into 2015.
Do two people make a consensus? No, even if they are Fed presidents. This is at least two people close to the same page. One is saying by mid-year, and one is saying by the fourth quarter. In rounding terms, that puts the end of tapering likely sometime around late this summer.