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Must-know: How the Fed influences restaurant sales

Part 2
Must-know: How the Fed influences restaurant sales (Part 2 of 7)

Why the Fed may not taper quantitative easing in December

A St. Louis Fed official tells the press that tapering was a close call

Whether the Fed (US Central Bank) will start tapering its current quantitative easing program is a subject of wide discussion. Two days after the central bank said it was going to hold on tapering, a St. Louis Fed official told the press that tapering beginning in October was still possible, and that September’s decision was a close call. James Bullard, the President of the St. Louis Fed, told the press that while the October meeting won’t have a news conference, it won’t be an obstacle to reducing bond purchases if data shows the economy has strengthened.

S&P 500 2013-09-23Enlarge Graph

Major indexes down because of the Fed’s comments

Because of what Bullard said, major indexes like the Dow Jones Industrial Average and the S&P 500 fell more than 0.50% on Friday, September 20, 2013. Investors shouldn’t worry too much, though, because one month isn’t really a lot for the Fed to change its mind, unless economic activity really starts to kick into higher gear. It’s important to consider that because these officials hold such a huge responsibility, it’s very unlikely they would do anything reckless. Besides, as the famous Warren Buffet recently touted, the Fed is in no hurry to taper. (We’ll see why later.)

How about the December meeting?

The next news conference will be held in December. That leaves the Fed with three months of additional economic data to study how employment growth and business activity is performing throughout the United States. If things are looking to the upside, then tapering could happen. But there may be one obstacle that would stop the Fed from scaling back even if economic growth picks up: Ben Bernanke is leaving. Most expect Janet Yellen, the current Vice Chairman of the Fed, to be the successor, after Larry Summers pulled his bid to become the next Chairman.

In the media, Yellen is well known as the official with higher accuracy (compared to her peers) of forecasting where the economy may be in the future. This is very important, because without a good sense of direction, you can’t take appropriate policies and facilitate stable economic growth. In mid-2000, she raised concerns about the huge housing bubble, and in 2007, she also cautioned about the impending credit crunch, while most Fed officials were concerned with high inflation. What we may begin to see is calmer price movements in the market and less of those gigantic waterfalls we saw in 2010 and 2011.

The Fed may not taper in December

The transition from Bernanke to Yellen could be a reason for the Fed to keep its policy unchanged in order to facilitate a smooth transition. Besides, December is when Christmas happens, and who wants to make sudden changes to policies? Yellen has also voiced in previous years how slow the recovery is going to be because the recession we’ve seen has been one of the worst in US history. She also mentioned that unemployment is a top priority and it may even be fine if the inflation target (currently at 2.0%) is slightly exceeded if necessary to bring unemployment down. A word of caution, though: Yellen isn’t all love for quantitative easing and love for inflation. If inflation does start to increase more than the Fed wants, she isn’t afraid to start tightening monetary policy, as some writers say.

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