Fed in focus as markets look to another taper
01:00, 19 mars 2014
· Av CMC Markets
Today's FOMC decision has been the subject of a great deal of speculation given how poor some of the most recent US economic data has been.
Setting aside the accuracy of economic forecasts the recent cold weather that has affected most of the US has been cited as the main reason behind the slowdown in the US economy that has taken place in the last few months.
There is certainly an element of truth to that argument, after all building houses in sub-zero temperatures wouldn't be my first choice of past time, but the real concern is whether the bad weather is hiding a much more inherent weakness that at the moment is not immediately apparent.
As a result of the bad weather we've had the bizarre scenario as good data being lauded as evidence that the economy is recovering in spite of the weather at the same time as bad data being dismissed as purely weather related.
This argument might hold water if there had been a consistency in how the data was being reported. Unfortunately this has not been the case, and for an economy that is driven largely by consumer demand there has been evidence that the economic slowdown seen in recent months pre-dated the start of the bad weather, which might be a cause for concern. In fact there is an argument that the recent slowdown started just after the US government shutdown in October.
In fact US retailers like Target and Wal-Mart had warned of the prospect of a slowdown as far back as August last year when they revised down their forecasts into year end. This slowdown in economic activity has been reflected in the monthly retail sales data since October which had until February's numbers been trending lower.
Despite concerns about the weather and uncertainty in global markets the Fed seems determined to press on with its tapering program given the current tone from policymakers like Dallas Fed's Richard Fisher and Philadelphia Fed's Charles Plosser.
Even the recent comments from new Fed Chair Janet Yellen speak to a desire to continue to taper and look past the recent weakness in the data, while the recent Fed Beige Book mentioned the weather over 100 times, so it is likely to get a few mentions this evening.
It is somewhat ironic that the weakest quarter for retail sales in several years is unlikely to be enough to stop the course of the next taper of Fed asset purchases.
As such it would be a significant surprise if the Fed were to hold back from tapering another $10bn at today's FOMC meeting. With US 10y treasury yields currently trading in and around 2.7% the opportunity to continue to pull back, are akin to pushing at an open door, irrespective of concerns about emerging markets.
Any pause could well signal to the markets that the Fed is concerned that the economy is weaker than they have currently admitted and it is in this context that the new economic forecasts and guidance thresholds will be closely monitored, while Janet Yellen's first press conference as Fed chief will be closely scrutinised for an assessment of how much the Fed thinks the recent cold weather has affected the US recovery.
We could also see the Fed drop its unemployment target now that we are within touching distance of the 6.5% threshold, which would see it follow the Bank of England's example. Whether they go the extra mile and adopt a policy that seeks to assess the amount of spare capacity in the US economy is unlikely given how much of a woolly measure it is.
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