One Man’s Opinion: Is The Federal Reserve Likely To Initiate Tapering In September?

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92835431US July nonfarm payrolls data came in at 162,000, well below the 200,000 forecasted by most economists, and showed the labor market continues to improve, but at a frustratingly slow pace, said Mohamed El-Erian, chief executive officer and co-investment officer at PIMCO.

Internal factors like earnings, long-term unemployment rate, labor participation rate and youth unemployment rate indicate the situation is very fragile. So, the signals that go out to the public are very different from the signals that go out to the US policymakers. The signals to the policymakers are two-fold: First, (the Congress) should refrain from creating extra headwinds because of the imminent debt-ceiling discussions when congress meets; and second, the FOMC members and the Federal Reserve should realize the job on hand is very complicated, Mohamed added.

Asked how damaging a political-gridlock could be for the economy, Mohamed said the polarization in Washington is a matter for concern since it creates headwinds for the economy and slows down the pace of growth. It is hoped that Congress has learnt its lesson from the 2011 debacle and will not put itself in a similar situation. If it hurls itself into a mine-field situation similar to 2011, it will create additional uncertainties for the economy. The matter can get compounded further because of the forthcoming German elections in September. Hence the latest employment report should convince policymakers not to create further headwinds, he noted.

However, a consensus on debt ceiling is likely to elude policymakers this time around as well when the congress meets after the recess and the gridlock is likely to continue with Democrats highlighting the drop in unemployment rate and Republicans underling the fact that job creation has been excruciatingly slow.

Asked if the Federal Reserve needs to factor-in the possibility of continued deadlock while deciding on tapering, Mohamed said the Fed needs to accept the fact that both internal and external downside risks to the economy exist. The decision to taper will also depend on both improvement in the real economy and the collateral damage a withdrawal/tapering will do. After Friday’s job report, it’s less likely the central bank will start tapering in September, Mohamed noted.

Asked what will push the Fed over the edge to really delay it, Mohamed said weaker data between now and September and, in Bernanke’s words, subsequent reassessment of costs and risks (of assets-purchase tapering). The Fed wants to slow down stimulus as the economy gets stronger, but is worried at the same time because the damage it will cause.

The Fed really needs to strike a balance, which is a very tricky job, he observed.

Congress seems to be complacent about the deficit problem in the short-term because the markets are hitting new highs. But the markets are going to respond if there’s a showdown over the debt-ceiling when the congress reconvenes.

And when markets respond, lawmakers respond and it generally takes a crisis to get members of the congress and the administration in gear. It may take that before they reach some sort of final resolution.

You can watch the video here.


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