Were indicators really compelling enough to induce Fed tapering?
At the last Federal Open Market Committee (FOMC) meeting held on October 29–30, the Fed was mulling tapering announcements in its next few meetings and had “decided to await more evidence that progress will be sustained before adjusting the pace of its (open market) purchases.” At the next FOMC meeting held on December 17–18, the Fed finally announced the onset of tapering.
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The Fed commented:
“Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.”
One indicator, the “Job Openings and Labor Turnover Survey” or JOLTS, issued by the Bureau of Labor Statistics (the BLS), produces monthly estimates of job openings, hires, quits, layoffs and discharges, and other separations. The crucial headline number, job openings, had grown to 3.84 million for August 2013 and had been growing year-on-year since May 2011. This may have been one of the indicators that swayed the Fed’s decision.
The FOMC meeting announcement also said that the Fed would continue to closely monitor economic developments in the coming months and continue its bond buying program (now reduced to $75 billion per month from $85 million per month) and employ other policy tools as appropriate “until the outlook for the labor market has improved substantially in a context of price stability.”
The pace of tapering that the Committee would follow wasn’t pre-set, and the Fed was likely to reduce the pace of asset purchases in “further measured steps” at future meetings depending on improvement in labor market conditions and inflation moving back toward its longer-run target of 2%.
To learn about the reaction of fixed income markets to the tapering announcement, move on to Part 6 of this series.