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The "taper," long expected by financial markets and endlessly discussed in financial media, didn’t arrive as expected on September 18.
At its meeting on September 18, the Federal Reserve's policy-setting arm, the Federal Open Market Committee (FOMC), countered market expectations that it would begin to "taper"—that is, withdraw monetary accommodation—following its unprecedented quantitative easing (QE) program. Under QE, which the Fed first announced in September 2012, the central bank has been purchasing $85 billion in bonds per month: $40 billion in agency mortgage-backed securities and $45 billion in longer-term Treasury securities. At its latest policy meeting, the Fed said it would maintain that pace.
The news was welcomed by investors, as equity and fixed-income markets rallied in the immediate aftermath of the Fed's decision to stand pat.
Why did the Fed refrain from tapering? "Taking into account the extent of federal fiscal retrenchment, 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 growing underlying strength in the broader economy," the Fed said in a statement. However, the FOMC "decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."1
The Fed added that when it decides to begin to remove policy accommodation, it will take "a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%."
The central bank also stuck with its policy of ultra-low interest rates. The central bank left the target range for the fed funds rate at 0–0.25%.
The Fed said that it expected economic growth "will pick up from its recent pace and the unemployment rate will gradually decline" toward a level consistent with its dual mandate of full employment and price stability. The central bank upgraded its assessment of the economic recovery, citing "moderate" growth, compared with the "modest" growth referenced in its last policy release.2 The Fed added that "fiscal policy is restraining economic growth."
As in its previous statement, the FOMC noted that inflation is actually running below its objective of 2%. The committee warned that if inflation "persistently" remains below that level, it "could pose risks to economic performance," but the FOMC anticipates that inflation will move back toward its objective over the medium term.
The Fed's "data-dependent" approach to policy was reiterated in the statement. "Asset purchases are not on a preset course," it said, and added that decisions about their pace "will remain contingent on the committee's economic outlook." The Fed said it will "closely monitor incoming information on economic and financial developments [and] at its coming meetings, assess whether incoming information" supports its expectation of ongoing improvement in labor market conditions, and inflation moving back toward the Fed’s longer-run objective.
The Fed continued to express concern about the housing sector, a crucial component of the economy. The Fed noted that "mortgage rates have risen further," signaling continued concern that such an increase could impede the recovery of the housing sector.
Conscious of the market's dramatic move since May, the tightening impact of higher rates on housing and the level of refinancings, the decision to hold off on tapering by outgoing Fed chairman Ben Bernanke was welcome news to investors. Clearly, the level of jobs growth has slowed in the last three months, to average less than 150,000 from the more rapid pace of 190,000 over the first four to five months of the year.
Guidance that the Fed would take its time in reducing bond purchases was both welcome and appropriate. While this could delay a longer-term path toward interest rate normalization, it does slow the rapid rise in yields that has characterized U.S. Treasury markets since May.
The Fed's decision to stand pat on QE on September 18 removed one more opportunity to fashion an "exit strategy" not only for the central bank and its current policy thrust but also for Bernanke himself. The departing Fed chairman probably does not want to end his final term known as "Helicopter Ben"—that is, the man who showered massive amounts of stimulus on a tottering economy. Instead, to harken to another mode of transportation, he might want to be known as the man who was able to steer the good ship QE back toward port after a lengthy and often tempestuous voyage. However, it looks like market volatility and ongoing weakness in labor markets convinced "Captain" Bernanke and his crew to stay the course for now.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.