Why did the Fed decide not to taper?

Is it afraid Congress might do something really stupid?

By Jim J. Jubak Sep 18, 2013 5:45PM

Did Congress and the strong likelihood of a government shut-down after Sept. 30 lead the Federal Reserve to decide to postpone any taper?


That’s my initial conclusion after reading the press release from the Federal Reserve’s Open Market Committee and watching Fed chairman Ben Bernanke’s press conference on Wednesday. When looking for any explanation as to why the Fed kept its program of buying $85 billion in Treasuries and mortgage-backed securities intact, it’s the language that points toward fiscal tightening that pops out at me.

First, in the Fed’s press release. Oh, there are a few tweaks to past statements. For example, the line "Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated" added "some" to the committee’s last press release.


Image: Federal Reserve Building (© Hisham Ibrahim/Corbis)But if you’re looking for major changes -- you know, like a sentence or two -- the only one I see is this addition:


"Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."


In other words, the Fed decided not to cut its stimulus to the economy in the face of the possibility that Congress won’t pass a budget before Sept. 30 -- and that all authority for discretionary spending will cease as of that date, and the fact that proposals for continuing resolutions floating around House committees all assume that the spending cuts in the sequester will set the new baseline for lower continuing spending.


Second, in Bernanke’s press conference, the Fed chairman noted that prior comments on the economy pointed toward a potential taper, but that the Federal Reserve did not have the confirmation for sustained economic growth that would have made it confident in pushing ahead with a taper of asset purchases.


The economic outlook at the Fed, Bernanke continued, was much the same as those at the central bank in June, but the Fed didn’t feel it had the confirmation it needed to begin a taper. In other words, something, perhaps something recent, made the Fed reluctant to move. (The last thing the Fed wants to do is taper asset purchases and then see the economy weaken so it has to resume those purchases. Talk about whipsawing a market.)


It’s always tough to parse press releases and press conferences from the Fed, and I’m clearly arguing from very small bits of evidence.


But if I’m right, the irony of Wednesday’s post-Fed move to a new all-time record on the Standard & Poor’s 500 ($SPX)is worth savoring. In this view the stock and bond market are rallying because the Federal Reserve is afraid that Congress could really muck up the U.S. economy in the next few weeks (or days.)


Think about that as Treasuries rally, interest rate sensitive stocks move up and the dollar falls.


Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of any company mentioned in this post as of the end of June. For a complete list of the fund’s holdings as of the end of June see the fund’s portfolio.


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Tags: $SPX
30Comments
Sep 18, 2013 6:13PM
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Seems the "congress critters", those stupid politicians can get their act together and pass a budget. WHY ARE PAYING THESE A**HOLES! GET RID OF ALL OF THEM AND START OVER. MAYBE IF WE, THE VOTERS, DO THAT OFTEN ENOUGH, THEY WILL LISTEN. And we should take away all their perks, like lifetime retirement after 4 years, free family healthcare for life, working less than 180 days per year and getting paid for a full year, free trips home, more vacation than I ever saw when I was working, etc.
Sep 18, 2013 10:09PM
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Jimmy, it's folk like you that stated the FED was going to Taper. The FED itself never made any such statement. Uncle Ben each and every time gives out vague statements to either lowering or raising the amounts each Month. The Main Stream Media then gave it their own bogus spin.

Wall Street should be disturbed that the FED's Balance Sheet is growing so quickly. That would make more sense. However it and Rates are doing exactly opposite of what a Free Market determines.

Financial engineering of this type usually ends very badly. Whether it's this year or next, pump priming Markets up for this long means there is a better than average chance that the next BEAR market will Last far longer than most actually expect. We are witnessing a historical Global Moment, and it won't end well.

Sep 18, 2013 9:44PM
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Berbake decided to hold his guns and let next guy to take the risk.
Sep 18, 2013 11:08PM
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For the record, there were a few of us on these boards who correctly predicted the Fed would not taper now.   It was just a bad time and the Fed was just too scared to pull the trigger.  There's the upcoming budget fight.  We're about to hit the debt ceiling.  Bernanke will be gone in a couple of months anyway.  And we'll be getting a better read on consumer spending with the holidays coming up.  And lest we forget, GDP is still way too low and the official UE rate is still well above the 6.5% target.  My guess, they don't start pulling back QE until well after Yellen is at the helm.
Sep 19, 2013 12:53AM
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No, the Fed is just showing that their theme song is "I'm just a girl who can't say NO". Ironically, them taking it up may incite Congress--who has claimed that song for so long--to actually cut back. But I'm not holding my breath, not with Obama acting like any reduction would be a personal violation. All of them, from Obama on down, need to get off their high horses, but since that's the leadership from the President, I doubt any of them will.
Sep 19, 2013 5:00AM
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Jim Jubak, don't you realize that Ben Bernanke needs EXCUSES to not taper?  It could be the budget battle, the debt ceiling, the possibility of war in Syria.

 

The real reason for not tapering is that the federal government cannot withstand the higher interest rates.  The National Debt of around $17 trillion makes it unwieldy to pay interest on the long term Treasury bonds at even 4% to 6%.  Only several years ago, it was no big deal for long term Treasury yields to be in this range.

 

So, why talk about tapering at all?  Bernanke is trying to keep unhappy bond investors at bay.  The ultra-low yields, which undermine their ability to make money, were presented as temporary back in 2009.  Bernanke is leading them on, one month at a time.  As of today, he has outsmarted them again, as the 10-year yield has fallen from nearly 3% (around a week ago) to 2.7%.  However, the trick won't work forever.  Many bloggers here seem to understand how dangerous this game is and that a crash is inevitable. 

 

When, though?  It depends on the EMOTIONAL WHIMS of private bond holders and foreign government officials.  The event is extremely non-linear and erratic. 

Sep 19, 2013 6:33AM
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"Folks should also be disturbed that Corporations will go out and borrow massive amounts of Money just to do stock buybacks and increase the Dividends. Folks should also be disturbed that's it the boneheaded actions of Uncle Ben that is allowing for these short sighted actions."

 

Just so everyone understands... say a publicly traded corporation will buy back $1 billion in stock. The stock it will buy back first is the shares given internally- to themselves. Typically they were part of the compensation package (so... free). The FACT exists that the share price is based entirely on Bernanke's bond-bought fiat money NOT actual tangible activity developed from enterprise. The $1 billion in funds used to make purchase will be borrowed-- the lender will use a derivative formulation to fund it... maybe $1 million from itself (generally an internally-concocted​ derivative) and seek the rest of it from others (generally externally-concocted​ and perhaps dark pool monies like from drug cartels). So... 100% of those monies are predicated on the future being better than it is today in a financial way. BUT... with every fiat dollar printed, the actual dollar dilutes (shrinks in value) so the possibility of the derivative formula working as represented is-- ZERO. It forces more bond-buying and more fiat money printing! There are $630 TRILLION... YES TRILLIONS in derivatives in the world right now... NONE have ever been reconciled. IF WE DO INDEED RECAPTURE DC AND FORCE RECONCILIATION OF THE FED AND ALL FINANCIAL INSTRUMENTS... they will be no different than a wart on the big toe of the globe that can be burned off and destroyed without any adverse effect on the rest of us. OF NOTE- a derivative contract liquidates BEFORE all stocks and other liens against the assets of the corporation. They sold the factories, they import the product, they are nothing more than a few paper and button pushers in leased office space, churning stock based on fake money into cash-in-pocket, then taken offshore or invested in hard assets. YOUR stock is worthless. THEY will rule the world soon. YOU will owe the interest on Ben's Bonds which will net you less than 50% of your paycheck in a diluted currency value economy. WAKE UP YOU IDIOTS!!!!!!!!!!!!!!

Sep 18, 2013 6:46PM
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No, they are afraid Congress will do something smart and cut up Obama's credit card.

 

We need NOT raise the debt ceiling, we need to SLASH government spending and we need to DEFUND Obamacare.

 

They FEAR '57 states' will INSIST on his new entitlement, and the country be damned...

Sep 19, 2013 10:19AM
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 Official unemployment of 7.1% plus labor force shrinkage of 3.6% equals real unemployment of 10.7% that's a long ways from Fed's goal of 6.5%.

Sep 19, 2013 9:52AM
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All I have to say is this cannot lead us into prosperity, we are headed down a dangerous path.  Bernake and his bosses should be held liable in the future when this scheme completely unravels and the country is broke.  It would be funny if this was not so serious but the lefties are praising this strategy; while bashing Bush when he and Greenspan were doing the same thing.  Same with Iraq and Syria.  Bunch of hypocrites who put party ahead of country and cannot think for themselves.  It is laughable to see these talking heads try and justify their support for these polices that mirror GHWB.  By the way, I think GHWB had some terrible policies which I certainly did not support - no ideology here, just facts and love of country. I support what's right not what's going to get my party elected next cycle.

 

What got us in this economic mess was cheap and easy money.  The present administration has not only kept that policy in place with Bernake, they have ten-tupled down on it.  We are headed down the same path but only worse.  Soon global market forces will kick in and our treasuries will be worthless, rates will skyrocket and we will be in a world of hurt. And all those wonderful free-money give away programs that have increased ten-fold under the present admin will disappear over night.  What we are doing is akin to feeding a fat kid candy because he throws a fit; it tastes good now but the kid will pay for it later (in the form of heart disease, obesity, diabetes, etc etc). 

Sep 19, 2013 10:46AM
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Bernanke made it quite clear that he has no intention of making anything clear.  Taper? He never said that he would taper, people mistakenly inferred that he would taper.  Oh, and the 7% unemployment level, well he said 7% but he didn't mean 7% like a line drawn in the dirt or anything.  No, he said the fed's actions were data dependent, but he in no way defined what or whose numbers he was talking about.
Sep 19, 2013 10:22AM
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Congress Screwed up with sequester and budget fights, the Fed has to pick up the pieces sadly go go.  If Congress would have pro growth, pro employment legislation they wouldn't have to buy 85 billion/month.  Cutting right now is like starving yourself while being anorexic,  If they can't settle the debt ceiling, might as well put another finger in the mouth.... cuz we ain't putting any real weight on any time soon.

85 billion is a symbol at this point and not a quantifiable number.
Sep 19, 2013 9:58AM
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It is sweet justice to see traders and the Media get burned by the Fed decision. Traders largely manipulated QE for profit,and the Media for sensationalism, while the Fed was focused on helping the economy  and creating jobs. Greed versus economic well being, Traders cannot help themselves -- even now they are trying to exploit QE. The world rallied on the Fed decision.   Only traders on Wall Street are trying to push markets down ...to profit The Fed decision was a win for the economy and the honest investor!!!
Sep 18, 2013 8:34PM
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Conservatives ARE offering to raise the debt ceiling which is a painful, painful thing for a true conservative to do, if only lefties will meet half way and defund one (just one) program ---CommieCare.

 

They could do something smart and avoid a government shutdown by passing, and the president not veto-ing, a continuing resolution to fund the government AND defund CommieCare.  It's in the left's court now.  If a shutdown occurs, it's their own stubborness that's the cause. 

Sep 19, 2013 8:05AM
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GOP said they are crashing the gov't so he took that into account. The crazies, Tea Party, Palin,. Bachman and Occupy Wall St are projecting negative pressures, so he took control to balance their nutty practices. Otherwise he would have tapered.
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