How to predict the Fed
A guide for the perplexed


Article Highlights

  • An informed reading of the Fed shows that it will likely not consider tapering down the QE purchases until the fall.

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  • Bernanke has to be very careful about what he says. Pay attention to Federal Reserve Bank presidents. They are much freer to speak their minds, and they do.

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  • If payroll gains average 200,000 or more per month over the summer, look for QE tapering in September.

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The Fed continues to be a major part of the news cycle. And the news media – and the markets – continue to have trouble reading the Fed, especially when it comes to predicting when it will reduce its purchases of Treasuries and mortgage-backed securities under the ongoing Quantitative Easing (QE) program.

An informed reading of the Fed shows that it will likely not consider tapering down the QE purchases until the fall. But confused observers have been concerned that it will come sooner. It won’t.

This confusion was readily apparent on the day of Chairman Ben Bernanke’s most recent appearance on Capitol Hill to discuss the economy and monetary policy, May 22. A few hours after Bernanke left the Hill, the Fed released the Minutes
for the Federal Open Market Committee (FOMC) meeting held on April 30 and May 1. The stock market initially rallied on Bernanke’s prepared testimony, which was interpreted as suggesting that the Fed would not dial down its QE purchases in the near future. But his answers in the Q&A with lawmakers seemed to undercut that notion, and the Minutes went even further by noting that a number of FOMC members were willing to consider tapering as early as the June meeting. The Dow finished the day in the red, after the largest intraday price swing since February.

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