Market participants were hoping for clarity following the highly anticipated FOMC meeting Wednesday on the big question: to taper, or not to taper?
As many expected, there were no explicit statements about when the Fed would end its massive quantitative easing (QE) measures.
"A few weeks back, I noted that Chairman Bernanke wouldn't have the guts to take his foot off the gas pedal when it came to stimulus, so it's no surprise to me that he's going to keep plowing $85 billion a month into bond buying," explained Money Morning Chief Investment Strategist Keith Fitz-Gerald. "What's interesting to me is that the market fell anyway, when he announced the economic risks have subsided."
The U.S. central bank kept its benchmark interest rate at 0%-0.25%, and kept in place its $85 billion a month bond purchase program. The consensus remains that the Fed will start to "taper" QE before the end of the year – although the timeline wasn't made clear today.
"I think the markets didn't get the clarification they wanted," Fitz-Gerald continued. "Are things good enough that stimulus is no long warranted or bad enough that bond purchases are still required? For a guy who promised a new era in Fed transparency, this is yet more double talk."
As for when interest rates (near zero since December 2008) could be raised – likely a separate and farther-out move than tapering QE – Morgan Stanley Chief Economist and former FOMC secretary and economist Vincent Reinhart has said the clue is in when QE starts to end.
He says if QE and rate decisions are data dependent, as the Fed maintains, the two cannot be separated. So any future Fed tapering talks suggests Team Bernanke has grown more optimistic about the health of the economy and less inclined to believe further QE will prove advantageous.
Bernanke said today any change in policy will come after stability in the Fed's economic forecasts.
FOMC Meeting: Hints Are in the Outlook
Overall the Fed saw "further improvement" in the labor market and lower inflation expectations.
"The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall," read the post-FOMC meeting statement.
In addition, the Fed expects growth to pick up in 2014 after slowing a tad this year, with the unemployment rate falling to a low as 6.5% by next year instead of 2015 as previously forecast.
A 6.5% unemployment rate is key for the Fed, as it has said it would keep interest rates near zero as long as the jobless rate remains above that threshold.
Despite the brightened forecast, 14 Fed members don't expect the first rate hike until 2015.
While Fed officials trimmed inflation forecasts for 2013, as expected, it kept estimates for 2014 and 2015 steady at close to 2%. Inflation is running low partly to "transitory influences," and will be closely monitored.
So what does this mean for the end of QE and higher interest rates?
"Their upgraded assessments for unemployment to fall to 6.4% in 2014 and for GDP growth to accelerate to 3% to 3.5%, would signal it's time to taper, were offset by language that articulated they are 'determined to get inflation to their 2% target,'" explained Money Morning's Capital Wave Strategist Shah Gilani. "But in fact, they see inflation going the other way. Certainly, that would signal that they are still fearful of deflationary tendencies and that they will keep the juice in the punchbowl."
"It's more of the same Fed speak so as to not jar the markets," Gilani said. "But we only have to look to what's happened in Japan to see our own future. More QE will be met with skepticism and fears of diminishing returns, and less QE will cause rates to rise, and banks in the short run, and bondholders in the long run to lose out big time. Volatility is back and it's going to rise inexorably."
FOMC Meeting: The BIG News…
The biggest Fed news this week actually came out before the FOMC meeting – and according to Money Morning Global Investing Strategist Martin Hutchinson, points to QE starting to end by 2014.
"The big news is that Bernanke is probably going next January," said Hutchinson. "He thus has to start tightening before he goes, because the new chairman won't have credibility initially (bond market crashed in 1979 and forced out a new Fed chairman, Bill Miller.) His statement in the meeting that QE "tapering" will begin this fall suggests he knows this!"
What will be interesting is to watch how Bernanke decides to unwind the billions of dollars in monthly asset purchases.
"It's not illogical to assume that the Fed doesn't actually know how to disengage," said Fitz-Gerald. "Kinda like that old line in Indiana Jones where he says he'll think of something as he charges off to recover the Ark."
Under Bernanke, the Fed has nearly tripled its balance sheet to around $3.3 trillion with its bond buying. The benefits of the "stimulus" measures are questionable.
"To paraphrase Jim Rogers…the people who are getting the trillions he's printing are having a lot of fun…I'm not so sure about the rest of the world," said Fitz-Gerald. "The sound we all hear is not applause but the can being kicked down the road further…Klink, clank, klunk."
- Money Morning:
What's So "Open" About the Federal Open Market Committee?
- Money Morning:
Today's Fed Meeting and Gold Prices
- The Wall Street Journal:
Parsing the Fed: How the Statement Changed
- Business Insider:
Vincent Reinhart: There's A Fundamental Flaw In The Message The Fed Is Trying To Send
Wall Street falls after status quo Fed statement