Should The Fed Have Tapered?

At the last Fed meeting on Wednesday, September 18, the Fed elected to bypass the widely anticipated beginning of tapering its historical stimulus package. Following its decision to forego some sort of tapering, there was much consternation and hand wringing regarding the confusion the Fed created by not following the script the market had laid down for the Fed to follow. Apparently the Fed did not get the memo that it is supposed to do exactly what the majority on the Street anticipate. Many market participants claimed that the Fed misled them with its intentions and caught them off guard. Many are claiming that instead of creating more transparency with its post meeting briefings it is creating more confusion by being too open about their intentions. How exactly does that work? Many of these comments are laced with a certain amount of bitterness from being caught off guard by the Feds inaction.

Did The Fed Mislead The Street?

Leading up to the meeting it did seem that the Fed had indicated from its earlier meeting in June that it would indeed consider scaling back some of its stimulus possibly as early as its next meeting. Thus began the street's incessant forecasting of the timing and amount of the impending first taper. To go back and read the notes from the Fed meeting in June there is no specific reference to either the timing or amount of any such taper. So the Street created its own details of the initial taper and that became gospel to all of the financial news outlets including CNBC and Fox News. These two news outlets ran daily commentaries about the prospective tapering and therefore reinforced the notion of a taper at the September meeting and between $10 and $15 billion as the initial reduction of stimulus. Where did the Street get these amounts from? They are not written down anywhere in the Fed's minutes. The Street jumped to conclusions on tapering, placed trades accordingly, got it wrong and the trades went against them, and now it's upset. Perhaps the Street will learn a valuable lesson from this latest episode. Not to front run a Fed that is not sure itself what it is going to do from meeting to meeting.

Did The Fed Miss An Opportunity?

The question remains, did the Fed miss an opportunity to begin tapering? Most economists that have been interviewed believe that some sort of tapering is warranted as the benefits of stimulus have less apparent impact on the real economy and only serve to drive up values of risk assets. This is an interesting question. The logic for tapering at the September meeting was that the Street had presumably priced in a reduction of stimulus and markets would not be adversely affected. A side benefit was that the Street would interpret tapering as a vote of confidence by the Fed on the state of the economy. After the initial rally in markets, particularly equity markets, markets have since sold off. Hindsight is 20/20 and it is very difficult to say how the Street would have handled an actual taper and not the idea of a taper. It is fair to say however that given the markets behavior since the "non taper" it is hard to imagine the market behaving any worse. The Fed has indicated that it is leaving the door open to any and all options regarding its stimulus package. After reviewing the latest data it has determined that tapering back was not warranted. With this in mind it is hard to justify the Fed tapering at this time.