The economy has not improved enough for tapering to begin between now and the end of the year thinks Lindsey Piegza, chief economist at Sterne Agee & Leach and a member of the National Association for Business Economics. The uneven data is really the underlying reason why Fed officials remained consistent in their bond purchase program.
The economy is yet to see a steady improvement that Fed officials want to see in order to warrant a rollback in bond purchases. A “steady” improvement is required because there’s only one employment report due between now and the next FOMC meeting, i.e. one data point before the govternment eventually comes back to full running capacity. And one data point doesn’t make a trend nor does it imply a steady improvement even if an outsized (jobs) report is published, she argued.
Asked to explain the recent revelation that there was a lengthy policy debate among the Fed officials over whether the economy had improved enough to begin tapering and that several members said the decision to hold off was “a relatively close call,” Lindsey said she would have expected a lot of conversation given that Fed officials have been increasingly vocal with a divergence of opinions.
So, a lot of conversation was expected to look into detail, into the data because, although the Fed has made labor data “the data” to watch, they are also looking at it in the context of the broader economy.
The overall data suggests there is juxtaposition between strength and weakness and that’s why a lot of Fed officials seem to be sitting on the fence, trying to determine if it would be appropriate to roll back purchases or not, she observed.
Asked to comment on Janet Yellen’s recent remark that more needs to be done to strengthen the US economy, Lindsey said Yellen probably meant more of the same in terms of continuing to support the economy with $85 billion in purchases on a monthly basis.
Unless the economy takes a considerably misstep, there’s not enough momentum to justify a ramp-up in purchases. A sizable misstep means a reversal in the unemployment rate, or a nonfarm payrolls reducing to less than a 100,000 on a monthly basis, she noted.
Asked if Dr. Yellen’s method of communication with the markets (forward guidance) will be radically different from chairman Bernanke’s, Lindsey said Yellen is likely to continue with the legacy of the Bernanke Fed, i.e. keeping transparency at the forefront of Fed communication and really allowing the markets to understand the motivation ahead of any Fed adjustment in policy.
Asked to comment on her (Lindsey’s) observation that if Dr. Yellen became the chairman of the Fed, she would continue Ben Bernanke’s policy, rather than charting her own legacy and breaking the glass ceiling, Lindsey said one of the most exciting ideas have been the first Fed chairman being a woman.
Yellen has arguably one of the most powerful positions in the world, and that certainly is a monumental occasion. Speaking about building her own legacy, it would be a very smooth transition from Bernanke’s policy making to Yellen’s. But again, it will be a continuation of his legacy as she begins to build her own, Lindsey concluded.
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