Will Yellen Temper the Taper?

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Wall Street Journal Article

[M]ost anticipate the Fed will dial back its bond-buying program by another $10 billion a month–and any changes to forward guidance.

The big issue is how Ms. Yellen begins to transition the Fed “from threshold-predicted forward guidance to more qualitative forward guidance,” said Michael Feroli, chief U.S. economist at J.P. Morgan Chase.

“We believe that this switch will be done with an intent to convey no change in the stance of policy, much like Indiana Jones replacing the golden idol with a bag of sand,” Mr. Feroli said.

On Feb. 27 during her second day of testimony, which was delayed due to weather, Ms. Yellen acknowledged the recent “soft data,” noting harsh weather had played a role in disappointing economic reports. She said the central bank could reconsider the reduction of its monthly bond purchases if the economic outlook changed significantly.

My opinion: While I don’t believe the economic outlook has changed “significantly”, I do believe a few things have occurred since the last FOMC meeting that would cause Yellen to hold back on another taper — namely Crimea and China.

The West’s standoff with Russia appears to be heading towards sanctions and thus tension and uncertainty.  These negative shocks will likely materialize in the US economy in the coming months.

China, having recently relaxed its currency trading threshold against the dollar to 2% (up from 1%), is showing more expansionary measures.  This will incentivize currency traders to purchase more dollars as the greenback becomes stronger against the yuan which would then cause credit to tighten within the US economy.

Uncertainty and credit tightening are two aspects of the economy the Fed is built to combat; which is why I think Yellen may temper the taper in order to steer the ship into the oncoming wave instead of allowing it to pound the hull.

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