Money Market Memo: This does not compute
Yesterday’s highly unexpected announcement that it is putting off any tapering for now may come at a significant cost for the Fed. By choosing to do nothing, an outcome almost no one anticipated, Chairman Ben Bernanke and his colleagues arguably undermined the credibility they spent the better part of the past four years building up through a more open and transparent decision-making process. This represents a real setback for a policy-making group highly dependent on the market trusting that the Fed will communicate its strategies effectively.
It didn’t help that Bernanke mentioned several times during the course of his post-meeting press conference that the Fed’s actions are data dependent and the recent data didn’t justify the Fed taking action at this time. We acknowledge that economic growth has been a little less robust of late but, along with many others, didn’t think it was significantly less to justify the Fed sitting on the sidelines. Ironically, the post-meeting statement from the policy-setting Federal Open Market Committee (FOMC) didn’t dwell on the economic softness either. It was only in response to a question that Bernanke suggested the Fed’s inaction really could be considered a “precautionary step’’ for what might transpire over the next several weeks as Congress and the White House jostle over a continuing budget resolution and the debt ceiling. There may have been other factors at work, but this pending showdown presumably tipped the scales in favor of doing nothing in what likely was a very close call within the halls of the Fed.
As to when tapering might begin, it’s virtually impossible that it will be at the October meeting given the aforementioned fiscal fight. There is a potential that something could occur at December’s meeting, but there are hurdles. Historically, year-end has not been an optimal time for Fed action and complicating that further is the reality Bernanke is a presumed lame duck and the FOMC will be in transition. Whatever may transpire, we expect the Fed will have a lot of work to do in coming months to repair the damage that appears to have been done to its mainstay currency—its credibility.