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Don’t Fear the Taper

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You can’t avoid reading about it.  The stock market is sinking  . . .  Treasury bond yields are spiking   .  .  .  The TAPER is coming!

The panic began in the wake of Jon Hilsenrath’s May 10 Wall Street Journal  report (after the markets closed on that Friday afternoon) concerning a new strategy by the Federal Reserve to “wind down” its quantitative easing program.  The disclosure was carefully timed to give investors an opportunity to process the information and get used to the idea before the next opening bell of the stock market.

By the time the stock market reopened on Monday, May 13 – the first trading day after Jon Hilsenrath’s article – there was a surprising report on April Retail Sales from the Commerce Department’s Census Bureau.  The report disclosed that retail sales had unexpectedly increased by 0.1 percent in April, despite economists’ expectations of a 0.3 percent decline.  As a result, the Taper report had no significant impact on stock prices – at least on that day.

The Wall Street Journal report carried plenty of weight because of Jon Hilsenrath’s role as de facto “press secretary” for Ben Bernanke, as I discussed in my last posting.  Since the WSJ article’s publication, there has been a steady stream of commentary about the threats posed by the Taper.  Nevertheless, the word “taper” was never used in Hilsenrath’s article.  In fact, the article included an explanation by Philly FedHead (and FOMC member) Charles Plosser, that the Fed has “a dial that can move either way”.  The dial could be set to a particular level with either an increase or a decrease.

Regardless of whatever the Fed may have planned, the flow of commentary has focused on the notion that the Fed is about to taper back on its bond buying.  The current incarnation of quantitative easing (QE 4) involves the Fed’s purchase of $45 billion in bonds and $40 billion in mortgage-backed securities every month.  We are supposed to believe that the Fed will gradually ease back on the bond purchases – whether it might begin with a reduction to $40 billion or $35 billion in monthly purchases  . . .  the Fed will gradually taper the amount down to zero.

Despite what you may have read or heard about the taper, it’s not going to work that way.  Beyond that, taper is not really an appropriate way to describe the Fed’s plan.  In other words:

Don’t fear the taper.

Josh Brown interviewed Jon Hilsenrath for CNBC on May 22.  Here is what Josh Brown had to say about the interview:

There was one thing Jon Hilsenrath did say in my interview with him on TV last night that I think is very important and clears up a big misconception. He explained that Bernanke himself will not be using the term “taper” that everyone else is bandying about. The reason why is that the Fed does not want to create the impression that one policy move will necessarily be attached to three or four others. In other words, suppose the Fed were to drop its rate of monthly asset purchases from $85 billion to some less number in one of the next meetings. This could be a one-off action with nothing else behind it, designed to temper the market’s expectations and gauge the effects.

I’d remind you that what Bernanke, as a self-styled “student of the Depression” fears the most, is a premature tightening a la FDR in 1937-1938, just as the nation was finally on the mend. If you think that this central bank, which has just spent the last six years patiently reflating the economy, is about to yank the rug out from under it at the last moment, then you haven’t been paying attention.

The wave of panic which followed Jon Hilsenrath’s May 10 article about the Fed’s plans for its quantitative easing program has yet to be calmed by Hilsenrath’s clarification about how the Fed’s new strategy is likely to proceed.  As Napoleon once said:

“Men are Moved by two levers only: fear and self interest.”


 

Bernanke Taper Caper

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On May 11, Bruce Krasting expressed outrage about Federal Reserve Chairman Ben Bernanke’s use of The Wall Street Journal’s Jon Hilsenrath as his “point man” for leaking out the latest news from the Fed.  Hilsenrath’s Friday afternoon report (after the markets closed) that the Federal Reserve is working on a strategy to taper back its quantitative easing program was carefully orchestrated to avoid roiling the stock market.

We recently saw a demonstration of how important the quantitative easing program has been to investors.  On Thursday, May 9, both the Dow Jones Industrial Average and the S&P 500 fell from intraday record highs during the last 90 minutes of the session.  Philadelphia Federal Reserve president Charles Plosser announced that he would join forces with Kansas City FedHead Esther George to advocate attenuation of the quantitative easing program at the June 18 FOMC meeting.  The news definitely spooked the stock market.

Friday’s report from Hilsenrath/Bernanke gave investors a chance to process what was being disclosed and to get comfortable with the idea that quantitative easing will not go on forever.  The leak was obviously timed to provide a decent interval before the stock market opened again.  There is no definite plan in place to end the quantitative easing program by any particular date, nor is there a planned date for the inception of the wind-down being discussed.  Here is a bit of how Hilsenrath explained what is taking place:

Officials are focusing on clarifying the strategy so markets don’t overreact about their next moves.  For example, officials want to avoid creating expectations that their retreat will be a steady, uniform process like their approach from 2003 to 2006, when they raised short-term interest rates in a series of quarter-percentage-point increments over 17 straight policy meetings.

Hilsenrath’s quote of Dallas FedHead Richard Fisher’s explanation of the plan was beautiful:  “I don’t want to go from wild turkey to cold turkey“.

Bruce Krasting was the first to begin spreading panic and misinformation about Hilsenrath’s report.  Here’s an example:

The Fed’s new plan is to taper off QE over the balance of the year.

Of course, the foregoing statement is completely untrue.  Hilsenrath never said that.  Does Bruce Krasting have his own source on the Federal Reserve Board, who is leaking secret information to him? 

Perhaps we might see some of Bernanke’s foes initiate a Congressional inquiry into the “Tapergate scandal”.  What did Jon Hilsenrath know and when did he know it?

For a long time, Hilsenrath’s role as Ben Bernanke’s de facto press secretary has been a subject of cynical commentary.  Many have joked that Hilsenrath will replace Bernanke when he retires.  At Bernanke’s press conferences which follow the FOMC meetings, I keep expecting to hear the moderator announce that the next question will come from Jon Hilsenrath of The Wall Street Journal  .   .   .   Hilsenrath would then take the microphone and say:

You know, Ben – that last question just reminded me of another matter which would be really important to these people   .  .  .

Meanwhile, back in the real world, stock market investors are being confronted with the challenge of taking baby steps toward the idea of life without quantitative easing.  At the same time – as Jon Hilsenrath explained – the Fed is attempting to reach a decision on when to begin such a tapering effort.