Taper, Schmaper

What is the Federal Reserve doing?

In its statement yesterday, the Fed noted that they decided to wait for more economic data before tapering their asset purchase program. In his press conference afterwards, Chairman Bernanke blamed tightening financial conditions and a soft labor market—along with a shot at the Federal Budget sequester—for delaying the taper process. He counseled patience—patience with the Fed, patience with the economy, patience with the process—to markets that have been itching to move.

The reaction was anything but. Bond yields dropped point-one-five percent, stocks hit all-time highs. Everyone had been expecting the Fed to start cutting purchases of Treasuries and MBS in September, and their statement yesterday even shaded economic growth higher. So now the whole thing’s on hold?

After June’s meeting, Bernanke announced the Fed’s intentions and the market freaked out. Interest rates went up too far, too fast, and Fed officials got out and walked it back. Yesterday’s announcement continued that process. The Fed needs lower interest rates to keep the economy growing, especially in the housing sector.

Formulating Fed policy is deliberative, messy, and fraught with uncertainty. Like sausage-making, the end product may be attractive, but the process can sure make you lose your appetite.

Douglas R. Tengdin, CFA

Chief Investment Officer

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