The US Federal Reserve will continue with its $85 billion-a-month assets purchase-program at least till the third quarter of 2013, feels Neil Datta, the Head of US Economics at Renaissance Macro Research.
Given the Fed’s propensity to air on the side of caution, the likelihood is that they keep buying into early 2014, he noted. The Fed made it clear at the end of its two-day FOMC meeting that they are going to taper the pace of assets purchase should the economic conditions improve even before unemployment rate hits 6 ½ percent; so it’s a little clarity in terms of their thresholds, Neil added.
Asked when the threshold will be reached where markets will make the first move, before the Fed makes any formal announcement for policy change, Neil said six consecutive months of 200,000 job additions from now will probably force the Fed to slow down its assets purchase program. That’s the benchmark Chicago Fed President Charlie Evans has set the target for, he noted. It was surprising to see the Fed saying every economic indicator is skewed to the downside.
Asked if the Fed is hedging its bets, Neil said the Fed is probably over-hedging. Even if the economic growth accelerates to 3 percent, the Fed will probably still buy $85 billion in bonds every month because the progress on unemployment has been extremely slow. The threshold of what satisfies the Fed is significantly higher that what it would take for the markets to be satisfied, he added.
The latest initial jobless claims number has been modestly better than the previous week. Asked to explain its significance, Neil said we will probably get another 200,000 number on nonfarm payrolls. The labor market is improving, it’s continuing to heal. The jobless rate is running at a cycle low. The Fed didn’t ramp up another $10 billion to bring the jobless rate down, neither did it push up the Philly Fed index to 2 from negative 12.5, he quipped.
Asked if the US equity market is forming a bubble, Neil he doesn’t believe US equities are over-priced. The US economy has got a significant amount of cyclical upside. The equity market, after adjusting for inflation, is well below than where it was at the prior peak in 2007.
This is a recovery that’s build on improving growth expectations and that will be sort of confirmed by stronger earnings growth, he argued. Asked if there’s bubble in the credit market, Neil said there are some markets that are overheating and the Fed knows that. If companies are putting their balance-sheets to work this year (greater private investment), there’s bound to be some rotation from corporate bonds to equities.
Asked if the current pace of recovery could be sustained when Bernanke steps down after nine months in January, Neil said the odds on favorite to succeed him is Janet Yellen. However, there are plenty of capable people – academic economists, who are capable of handling the Fed exit strategy when it does happen. Bernanke is a smart guy and Americans should be thankful for the steps he took during the crisis period.
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