By: Nelson Schwartz
August 22, 2013
Will they move in September or won’t they?
Ben S. Bernanke, the Fed chief, is expected to begin scaling back the economic stimulus before he steps down next year.
Maurice Dolan, a real estate agent, placing an open house sign in San Francisco. Mortgage rates began climbing after the Fed said the tapering was on the horizon.
The confusion over exactly when the Federal Reserve will begin scaling back its huge economic stimulus efforts only deepened Wednesday, with the release of a summary of the deliberations at the central bank’s last meeting in late July.
There were hints that some members of the divided committee are comfortable with beginning to ease the Fed’s program of buying $85 billion a month in government bonds and mortgage securities as soon as their next meeting in mid-September. But there were also indications that another camp within the policy-setting group favors waiting until December, or even later.
The only thing that was clear is that the Fed intends to keep Wall Street — and the rest of the world — guessing.
For one thing, a number of participants at the Federal Open Market Committee raised concerns that economic growth in the second half of the year would prove disappointing, which would tend to encourage them to delay any changes in their current policy,
In June, the Fed’s chairman, Ben S. Bernanke, indicated the stimulus program could be scaled back this year if economic data continued to be relatively positive. But he avoided setting any target dates to begin what many investors refer to as the Fed’s coming “taper.”
The minutes of the meeting did little to clarify the issue. While “a few members emphasized the importance of being patient and evaluating additional information before deciding on any changes to the pace of asset purchases,” a few others “suggested that it might soon be time to slow somewhat the pace of purchases,” the summary of the July 30-31 meeting said.
As a result, longtime Fed watchers came up with analyses so different from one another that it seemed as if they might be reading different documents.
In a report issued shortly before the stock market closed, IHS Global Insight concluded that “the Fed is unlikely to taper at the mid-September meeting,” and predicted a move in December instead.
One minute later, experts at Barclays offered their view that the minutes of the July meeting “do not alter our outlook for a tapering of purchases in September.”
Other institutions, like Goldman Sachs, hedged their bets. “Over all, we think this information is consistent with September tapering, but this is by no means certain,” the firm said.
With Mr. Bernanke all but certain to step down as Fed chairman early next year, most analysts expect the Fed to initiate the tapering process before he leaves office, and to do so at one of the meetings remaining this year — either September or December — where Mr. Bernanke is scheduled to conduct a news conference after the session. The committee will also meet in October, but Mr. Bernanke is not scheduled to address the media then.
On Wall Street, investors were just as uncertain as economists. After selling off immediately after the minutes were released at 2 p.m., stocks briefly rallied, only to fall back more deeply into negative territory by the end of the trading day. The most widely followed measure of the stock market among professionals, the Standard & Poor’s 500-stock index, fell 9.55 points, or 0.58 percent, to 1,642.80. The Dow Jones industrial average lost 105.44 points, or 0.7 percent, to 14,897.55. The Nasdaq composite index declined 13.80 points, or 0.38 percent, to 3,599.79.
Bond prices also dropped after the release of the Fed’s minutes, sending interest rates higher. The price of the Treasury’s 10-year note fell 20/32, to 96 20/32, while its yield rose to 2.89 percent, its highest level since July 2011. It was at 2.82 percent late Tuesday. While the difference between a start to the tapering on bond purchases in September vs. December might not seem very significant to most people, the Fed’s decision-making is already affecting such things as the value of 401(k) retirement accounts, mortgage rates for home buyers and currency values in many emerging markets of the world.
By pumping $85 billion a month into the economy through the bond purchases, the Fed has helped push up prices for many kinds of assets, especially stocks. The indications that the infusions might soon come to an end has generated increased volatility both on Wall Street and in stock exchanges around the world.
The bond purchases also have helped push long-term interest rates sharply lower, forcing mortgage rates to record lows. Since Mr. Bernanke first started signaling in the spring that tapering was on the horizon, those rates have increased significantly.
But some economists argue that the sooner the Fed pulls back on its extra efforts to revive the economy, the sooner the underlying economy will improve.
Whatever the timing of the taper, Fed policy makers made it clear in the minutes that the short-term rates set by the Fed would remain close to zero for considerably longer.
One notable source of strength identified by the Fed policy makers is the housing sector, which helped lead the economy down before the Great Recession, but has led the way during a fitful recovery. Even if mortgages become slightly more costly, they said, the housing market should continue to improve.
“While recent mortgage rate increases might serve to restrain housing activity, several participants expressed confidence that the housing recovery would be resilient in the face of the higher rates,” the minutes said.
Despite upbeat signs like the housing market, Ethan Harris, co-head of global economics at Bank of America Merrill Lynch, said the minutes left him less convinced that the Fed would reverse course in September.
“To me, the minutes nudge you away from an immediate tapering,” he said. “It sounds like they are still in the middle of the debate.”
Besides a lack of urgency in the tone of the meeting, Mr. Harris noted there was almost no discussion of the precise mechanics of how a tapering would proceed.
“If you are about to taper, you have to decide exactly what you’re going to do,” he said. “I think the September meeting will probably be more of a cementing of their views than an actual step forward.”
At Barclays, the chief United States economist, Dean Maki, stuck to his position that the tapering would indeed begin next month.
In particular, he cited language that said “a number of participants” in the meeting were comfortable that market expectations for monetary policy “appeared well aligned with their own expectations.”
“These minutes were fully consistent with September tapering and nothing here interferes with that idea,” he said.
To Mr. Maki, “it seems like the committee is unified behind Chairman Bernanke’s plans. That wasn’t obvious after the June meeting but by July there appears to be a broad consensus.”