Wednesday, September 18, 2013
Why No Tapering by Fed?
The Fed spit the bit. But then, it kind of had to.
Surprising nearly all Wall Street economists, the Federal Reserve postponed from its long-awaited, much-debated move to pull back on buying $85 billion a month of bonds to stimulate the economy. The Fed pulled its punch at the last minute, announcing Wednesday that it will keep up its purchases — after a mere hint of new policy spiked mortgage rates enough to add $120 a month, or 16%, to the monthly payment on the median-priced U.S. house.
The premise for "tapering,'' or beginning the long process of unwinding several years of central bank policy that opened new frontiers in cheaper and easier credit, has been that a strengthening recovery doesn't need so much stimulus any more. Trouble is, the recovery — especially in housing — began to crack almost as soon as Fed chairman Ben Bernanke began hinting about tightening in May.
FED: Central bank delays taper, surprising markets
MARKETS: S&P 500, Dow hit record highs as Fed says 'No Taper'
Housing is, as it has been since 2007, the linchpin on which this economic cycle now turns.
The gap between the economy we have, with 7.3% unemployment, and the sub-6% unemployment rate we want can be explained almost entirely by the continued sluggishness of housing construction. Housing starts this year have averaged an annual pace of 906,000 new homes and apartments. At the same point in the 1983 and 2002 recoveries, the comparable number was about 1.7 million, big builder Hovnanian Enterprises says.
At more than 4 jobs per new single-family home, that means a normal recovery in housing — not a 2005-like bubble — would add 3 million jobs, including both construction and spinoffs in housing-related retailers (think Home Depot) and manufacturing, Moody's Analytics says.
Quick arithmetic tells you that 3 million new jobs would take 1.9 percentage points off the unemployment rate. Voila, 5.4%. Even if the population grows before we get there, and some discouraged workers begin to look for work again, we would still be under 6%.
Ty Laffoon
NO TAPERING BY THE FEDS.... SO WHEN WILL THE RATES DROP AGAIN
In a surprise move, the Federal Reserve on Wednesday decided not to pare back the extraordinary stimulus it has pumped into the economy since the 2008 financial crisis, saying it wants to see more evidence that the economy's recent improvement will be sustained.
In a statement after a two-day meeting, the Fed's policymaking committee said it agreed to continue buying $85 billion a month in Treasury bonds and mortgage-backed securities. Most economists surveyed by USA TODAY expected the Fed to reduce the purchases by $6 billion to $15 billion.
Full text: The Fed's statement
First Take: Why Fed isn't tapering yet
The Fed noted that mortgage rates have risen recently and federal spending cuts are "restraining economic growth.
"The committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with underlying strength in the economy," the Fed said. "However, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."
The Fed also agreed to keep its benchmark short-term interest rate near zero at least until the unemployment rate falls to 6.5%, as long as inflation remains below 2.5%.
Begun a year ago, the Fed's bond purchases are credited with helping lift stocks and holding down long-term interest rates with the aim of stimulating the economy and job growth.
The Fed on Wednesday also slightly downgraded its economic forecast. It said it now expects economic growth of 2.3% to 2.6% this year, down from its June projection of 2.3% to 2.8%. For 2014, growth of 2.9% to 3.1% is expected, vs. its prediction of 3.0% to 3.5% in June.
The Fed sees a slightly improved jobs picture. It projects that unemployment, now 7.3%, will be 7.1% to 7.3% by the end of the year and 6.4% to 6.8% by the end of 2014. It previously expected unemployment of 6.5% to 6.8% at the end of next year. By 2016, U.S. should be near full employment, with the jobless rate falling to 5.4% to 5.9% by the end of the year, according to its forecast.
The Fed also expects inflation to be slightly tamer, running 1.3% to 1.8% next year. In June it forecast inflation of 1.4% to 2% in 2014.
Fed explainer: What is quantitative easing?
Markets: Reaction to Fed announcement
Most Fed officials still expect the first hike in the Fed's target short-term interest rate in 2015, and most say the target, now 0 to 0.25%, will rise to as high as 1% in 2015 and as high as 2% in 2016.
But many economists say the program's benefits have steadily diminished while risks such as eventual high inflation have grown. Fed Chairman Ben Bernanke has said policymakers likely would begin to taper the bond purchases this year and end them by mid-2014, assuming the economy improves and the unemployment rate, now 7.3%, falls to 7% by then.
Economic data have been mixed lately. Measures of manufacturing and service sector activity have been strong, but job growth has slowed the past three months and the housing recovery has lost some steam.
Still, some economists have said the Fed likely would assess the job market's cumulative progress since the bond buying began. Over the past year, for example, unemployment has fallen to 7.3% from 8.1% and monthly job growth has averaged 183,000, vs. 128,000 in the five months prior to the launch of the bond-buying.
Also, the economy is expected to pick up late this year as the effects of federal spending cuts and a payroll tax increase fade.
Since Bernanke began signaling in May that the bond purchases would soon be scaled back, 10-year Treasury yields have risen a percentage point to about 2.85% and 30 year fixed mortgage rates have jumped to 4.57% from 3.51%, damping mortgage applications.
Ty Laffoon
In a statement after a two-day meeting, the Fed's policymaking committee said it agreed to continue buying $85 billion a month in Treasury bonds and mortgage-backed securities. Most economists surveyed by USA TODAY expected the Fed to reduce the purchases by $6 billion to $15 billion.
Full text: The Fed's statement
First Take: Why Fed isn't tapering yet
The Fed noted that mortgage rates have risen recently and federal spending cuts are "restraining economic growth.
"The committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with underlying strength in the economy," the Fed said. "However, the committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."
The Fed also agreed to keep its benchmark short-term interest rate near zero at least until the unemployment rate falls to 6.5%, as long as inflation remains below 2.5%.
Begun a year ago, the Fed's bond purchases are credited with helping lift stocks and holding down long-term interest rates with the aim of stimulating the economy and job growth.
The Fed on Wednesday also slightly downgraded its economic forecast. It said it now expects economic growth of 2.3% to 2.6% this year, down from its June projection of 2.3% to 2.8%. For 2014, growth of 2.9% to 3.1% is expected, vs. its prediction of 3.0% to 3.5% in June.
The Fed sees a slightly improved jobs picture. It projects that unemployment, now 7.3%, will be 7.1% to 7.3% by the end of the year and 6.4% to 6.8% by the end of 2014. It previously expected unemployment of 6.5% to 6.8% at the end of next year. By 2016, U.S. should be near full employment, with the jobless rate falling to 5.4% to 5.9% by the end of the year, according to its forecast.
The Fed also expects inflation to be slightly tamer, running 1.3% to 1.8% next year. In June it forecast inflation of 1.4% to 2% in 2014.
Fed explainer: What is quantitative easing?
Markets: Reaction to Fed announcement
Most Fed officials still expect the first hike in the Fed's target short-term interest rate in 2015, and most say the target, now 0 to 0.25%, will rise to as high as 1% in 2015 and as high as 2% in 2016.
But many economists say the program's benefits have steadily diminished while risks such as eventual high inflation have grown. Fed Chairman Ben Bernanke has said policymakers likely would begin to taper the bond purchases this year and end them by mid-2014, assuming the economy improves and the unemployment rate, now 7.3%, falls to 7% by then.
Economic data have been mixed lately. Measures of manufacturing and service sector activity have been strong, but job growth has slowed the past three months and the housing recovery has lost some steam.
Still, some economists have said the Fed likely would assess the job market's cumulative progress since the bond buying began. Over the past year, for example, unemployment has fallen to 7.3% from 8.1% and monthly job growth has averaged 183,000, vs. 128,000 in the five months prior to the launch of the bond-buying.
Also, the economy is expected to pick up late this year as the effects of federal spending cuts and a payroll tax increase fade.
Since Bernanke began signaling in May that the bond purchases would soon be scaled back, 10-year Treasury yields have risen a percentage point to about 2.85% and 30 year fixed mortgage rates have jumped to 4.57% from 3.51%, damping mortgage applications.
Ty Laffoon
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