What a QE Taper Means for Markets and the Next Fed Chair

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On Tuesday, Federal Reserve Bank of Chicago President Charles Evans announced that he wouldn't be surprised if the central bank begins to taper its $85 billion monthly bond-buying program in September.

Evans is the third official this week to signal a QE taper. Richard Fisher, president of the Dallas Fed, and Dennis Lockhart, president of the Atlanta Fed, parroted Evans' sentiment.

While Fisher indicated he would prefer to cut back bond purchases in August, Lockhart stated a preference for a September QE taper, although the Fed could wait longer if economic growth and unemployment trends reverse.

But it is Evans' announcement that is the most important. Evans is a member of the activist wing of the Federal Reserve. These members strongly support unconventional monetary policies such as bond buying, which are designed to reduce borrowing costs to spur aggregate demand and hiring across the country.

His views reflect those of the majority of members of the FOMC, the Fed's monetary policy committee.

"We are quite likely to reduce the flow of purchases rate starting later this year – I couldn't tell you exactly which month that will be – and it's likely to wind down over time in a couple or few stages," Evans told reporters.

Despite the signs the Fed will begin a QE taper, Evans said the central bank will continue to maintain low interest rates until unemployment falls below 6.5%, a feat that likely will not happen until mid-2015.

In the meantime, the era of cheap money will extend until GDP growth reaches 3%, a figure Americans would welcome given the stagnate economy of the last two years.

Wiggle Room in Baked Numbers

Even if unemployment falls, the data behind the jobless figures does not paint the picture of an economy improving its health.

The 7.4% unemployment figure has been driven by two hidden points of data that most Americans ignore: the rise of part-time employment and the outright departure of millions of Americans from the U.S. labor force.

Join the conversation. Click here to jump to comments…

  1. Naveen Kalyani | August 8, 2013

    "What a QE Taper Means for Markets and the Next Fed Chair", this will mean millions of things for the global economy for sure. But there is a need embrace the fact that markets should not like QE at all.

    Here's an article called "Global stock markets should not like QE" at http://ow.ly/d/1oWE on pp. 188-189.

  2. Brad M | August 23, 2013

    So much growth based simply on easy money policy and refinanced debt over last few years. GDP and inflation measurements have been altered so many times as to have less true meaning anymore. Where do we really stand? If tapering really does occur, we will find out if there are any real legs to the current "growth" being experienced. I say it could just be rhetoric by the Fed, 1. just to save face and say that they are/did discuss it and 2. to test market reactions to even the threat of it and determine if it is feasable ( make some folks some money doing that too ). But sooner or later, the markets must face the reality of what is fundamentally truly there. This could be painful. I believe the next Fed chair will likely push for more QE, as they do not consider inflation a current threat, and still see unemployment higher than desired. They may taper amount gradually though. Hold on! Inflation could come in like a wildfire if the right events occur.

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