No Taper Tipoff: Fed Keeps the Easing Going

The Federal Reserve will keep their version of the monetary printing press running a while longer. In today's meeting, the central bank's Open Markets Committee tiptoed around the "tapering" question, saying they will continue watching the economy for more gains.

By: Jeff Cox
Wednesday, 19 Jun 2013
CNBC

The Federal Reserve will keep its version of the monetary printing press running a while longer, and provided few hints Wednesday that the days of extreme easing are coming to a close.

In a decision eyed with a surgeon's precision on Wall Street, the central bank's Open Markets Committee tiptoed around the vaunted "tapering" question, saying it will continue watching the economy for more gains.

The Fed more or less met market expectations for this meeting, though some traders thought it would lay out a groundwork that could lead to at least a modest tightening of its $85 billion a month bond-buying program by September.

"Most on Wall Street had expected that the Fed would use this June meeting to finally signal that the deceleration of its quantitative easing program is in sight, if not exactly underway," said Peter Schiff, CEO and chief global strategist at Euro Pacific Capital. "But even these modest expectations have once again been unfulfilled."

After a powerful rally earlier in the week, markets momentarily recoiled at Wednesday's news.

Stocks sold off briefly while Treasury yields rose, but both quickly moved near their levels prior to the statement's release.

The Fed statement changed little from the May meeting, though it did sound a modestly upbeat note on the economy.

"We pretty much have a Fed statement and summary of economic projections that leave us believing what we believed yesterday, which is the Fed is going to taper at some point, maybe at the end of this year, maybe in 2014," said Art Hogan, managing director at Lazard Capital Markets.

In its economic projections, the committee modestly raised its expectations for gross domestic product growth for 2014, from 2.9 to 3.4 percent to 3.0 percent to 3.5 percent. Chairman Ben Bernanke had never presided over an economy that grew more than 3 percent on an annualized basis.

"The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall," the statement said.

The release of the FOMC statement precedes a 2:30 pm news conference from Bernanke.

Markets have been intent on finding signs for when the Fed will end its quantitative easing program, which has driven the central bank balance sheet to $3.45 trillion and sparked worries about asset bubbles in risk assets.

The Fed credits itself with funds that it uses to buy Treasurys and mortgage-backed securities.

As part of a historic level of easing, the Fed also has kept its target funds rate near zero, where it will stay until unemployment falls to 6.5 percent and inflation rises to 2.5 percent. The jobless rate currently stands at 7.6 percent while inflation is tracking at 1.4 percent.

"Wall Street has already traded out those statements and bulls will now focus on the comments about the likelihood of an increase in rates not occurring until 2015," said Todd Schoenberger, managing partner at LandColt capital in New York. "Keeping rates low indicates a continued bull run in equities for the foreseeable future."

In its statement Wednesday, the Fed forecast the jobless target will be hit in 2014. It also cut its inflation outlook.

Critics also have wondered why the central bank continues in extreme easing mode even though the economy is well enough the financial crisis-era levels and the S&P 500 stock index has gained more than 140 percent since the March 2009 lows.

In anticipation that the Fed will unwind the third leg of QE, stocks have been choppy though generally higher while the 10-year Treasury yield has climbed to 2.21 percent, recently hitting its highest level since late-March 2012 and up more than half a percentage point from the 1.66 percent at the May fed meeting.

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