Federal Reserve: Brace for a December taper?

The Federal Open Market Committee (FOMC) kept its policy rate target unchanged at 0% and its asset purchase program unaltered. Considering the partial government shutdown and the debt ceiling fight, it was widely expected that the FOMC would refrain from making any changes to its policy.

The economy continues to expand at a moderate pace, and moderate may be good enough for the Federal Reserve (Fed) when it comes to thinking about trimming its asset purchases. If the economic data for October and November prove to have weathered the storm in Washington, D.C., we could see the Fed begin to trim its asset purchases in December. There are two clues in the FOMC statement that lead me to believe we could see a December taper.

First, the Fed has now seen how the economy reacted to slightly higher interest rates. According to the Fed, the housing recovery has slowed. The Fed seems to think this slowdown in the recovery is not a stopping of the recovery.  Double-digit year-over-year increases in home prices are not sustainable. As long as the number of homes bought and sold or built continues to grow, the Fed might not mind a slight slowdown in the pace of price increases.

Second, the Fed eliminated a segment in the statement saying that financial conditions tightened. Apparently, the Fed thinks financial conditions have improved and have proven to be robust to slightly higher rates.

Perhaps Ben Bernanke’s swan song as the Fed Chairman will be a song of tapering. He will have a press conference after the December 17–18 meeting where he can croon about how the asset purchases have helped and how they will cease in good measure.

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