What Wall Street Economists Are Saying About The Fed's Surprise
Here's what they are saying.
Kevin Cummins, UBS: Today's statement also cut the reference to a "tightening in financial conditions observed in recent months", a reference we had trouble squaring with reality unless "financial conditions" was simply code for "mortgage rates". Presumably, officials are now happier with the recent decline in interest rates, especially mortgages. All in, there was nothing here to contradict our outlook for policy. With data likely to be muddied by collection difficulties, the first QE taper seems to be a question for Q1(14), with the Jan. 28-29 FOMC meeting somewhat more likely than the March 18-19 meeting. (Note: A January announcement would likely mean the start of tapering in March, as the Fed's purchase schedule is announced in advance, so that the schedule for February purchases will likely exist by the Jan 30 Fed meeting.)
Steven Englander, Citi: The statement did not change much from September and in absolute terms there was no hawkish bias. However the market had moved far beyond the reaction to the September non-tapering surprise to pricing in tapering beginning no early than March and ending in end-2014 or early 2015. To justify this pricing you needed far more aggressive language than the Fed delivered. If anything, they lowballed on the disappointing incoming numbers (except a brief nod to weaker housing) and continued to use September language that emphasized the medium term economic improvement. Hence a dovish and pessimistic market was confronted by a Fed looking at the bright side of life. If anything, with Beige Book having characterized growth as 'modest to moderate', the unadorned 'moderate' in the Statement comes across as confident.
Chris Rupkey, Bank of Tokyo-Mitsubishi UFJ: In September they tacked on a caveat to the diminished risks sentence saying tighter financial conditions, "higher mortgage rates," if sustained, could slow the pace of improvement in the economy and labor market. That must mean something, that they dropped that warning. They must be somewhat more confident about the outlook. Net net, we are not going to buy in to the idea that the Fed will wait to taper until March or June next year. The economy is not going to go off the rails because of the uncertainty down in Washington. We have two more monthly employment reports before the December meeting and if even one is a 200K jobs number, we think they taper in December. Again, they dropped the reference to tighter financial market conditions, that's got to mean something. They must be somewhat more confident about the outlook.
Aneta Markowska, Société Générale: Overall, the FOMC seems satisfied with recent progress, and is relieved that some of the risks have failed to materialize. The committee sees the underlying growth (ex fiscal restraint) as having strengthened gradually since the launch of QE. Their bias is clearly towards tapering, the only question is when. The Fed has once again decided to wait for more evidence that progress will be sustained before reducing the pace of asset purchases. We now see the March meeting as the most likely timeframe for the first tapering announcement. December is not out of the question, but with the October data distorted by the government shutdown, it is unlikely that the Fed will have enough clarity before year-end.
Jan Hatzius, Goldman Sachs: The October FOMC statement was just a bit more hawkish than expected. The FOMC's overall assessment of the economy was only marginally changed in the face of recent events, tighter financial conditions were no longer listed as an explicit worry, and there was no shift in language to more directly indicate a later expected date of the first reduction in asset purchases.
Paul Ashworth, Capital Economics: The latest policy statement from the Fed today is remarkable for what it omits rather than includes. Despite the wall-to-wall coverage in the financial markets and media of the two-week Federal government shutdown, particularly what impact it had on the economy, and the new uncertainty over whether a second shutdown could be triggered early next year, the FOMC statement doesn't make a single clear reference to it. Not one. It's like the whole thing never happened. The only cryptic reference is to the "available data" when assessing the recent incoming economic data...But if officials are trying to downplay the impact of the shutdown and are happier with the level of long-term interest rates, then perhaps a December taper isn't quite as out of the question as we had previously thought. We still think sometime early next year is the most likely outcome, but the balance of risks just shifted a little.
Kit Juckes, Société Générale: Fears about what happens as a result of higher bond yields have gone, but the housing market recovery has stalled. This is 'dovish' I suppose but I don't suppose there is a single economist, strategist, journalist, trader or barman who expected anything less dovish. The market therefore, sees this is a slightly hawkish light and the DXY rebound continues...But honestly folks, this is the most dovish CB out there simply failing to surpass expectations. For choice I look for the dollar rebound to go a bit further, and long USD/CAD is my favourite way to express that, while receiving USD and EUR rates after a day of soft inflation numbers which will slowly filter down into folks' rate expectations in the coming days.
Andrew Wilkinson, Miller Tabak: The message from the Fed is that the economy remains on course for recovery and that it sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall. The Fed is on hold, but the tone of the statement and the failure to bend on account of the government shutdown is very likely to bring forward the market's timetable of tapering from March where we feel the pendulum has swung too far. It would seem the Fed's approach is extremely balanced and that members are taking a level-headed view of the impact of interruptions to the economy. We believe that the central bank does not want to confuse the market by chopping and changing its view at a micro level. A bigger change might come for example should their be failure to agree on budget measures that would threaten further the ability of the government to remain open.