December Taper?

Fed leaders are discussing taper-talk now as a result of the latest 7% unemployment data as it offers political cover for such a tapering move. Others suggest the unemployment data is not credible given how misleading the current data can be as so many potential workers have dropped from the employment rolls.

Seems as though Dallas Fed President Fisher has read some of my recent market commentaries. Now that he will become a voting member of the Federal Reserve Board of Governors perhaps his common sense approach should gain a bit of traction.

Mr. Fisher said:

“Against that background, I believe that the current program of purchasing $85 billion per month in U.S. Treasuries and mortgage-backed securities comes at a cost that far exceeds its purported benefits. Presently, there is no private or public company that I know of, including many CCC-rated credits, that does not now have access to sufficient, cheap capital. There is no private or public company I know of that considers monetary policy to be deficient. Instead, to a company, every CEO I talk to feels that uncertainty derived from fiscal policy and regulatory interference is the key government-induced deterrent to more robust economic growth and profitability.

The FOMC has helped enable a sharp turn in the housing market and roaring stock and bond markets. I would argue that the former benefited the middle-income quartiles, while the latter has primarily benefited the rich and the quick. Though the recent numbers are encouraging, easy money has failed to encourage the robust payroll expansion that is the basis for the sustained consumer demand on which our economy depends. It cannot do so in and of itself. Without fiscal policy that incentivizes rather than discourages U.S. capex (capital expenditure), this accommodative monetary policy aimed at reducing unemployment (especially structural unemployment) or improving the quality of jobs is rendered flaccid and less than optimally effective. And as to the housing markets, prices are now appreciating to levels that may be hampering affordability in many markets.”

I think that last paragraph suggests a growing concern within the Fed that the QE programs are being blamed for exacerbating income inequality. If left unchecked that concept could be a danger to the Fed’s independence in an election year like 2014.


Equities have had a great 2013 to this point and we are now in a period of the year that is traditionally positive for stocks. The risk of a pullback is always present, and with the prospects of tapering it is impossible to predict the extent of any pullback. The implementation of the (Un) Affordable Care Act has been a debacle by nearly all accounts, likely further impacting business confidence. The Fed continues to be extremely accommodative, and inflation readings are putting little pressure on them to change policy in the midst of Janet Yellen replacing Ben Bernanke next month.

While off the front pages for now, the debt ceiling debates will heat up again heading into 2014. While we don’t believe there will be a “grand bargain” and with 2014 being a major political election year, anything can happen.

The most recent contribution to business and consumer frustration from the Federal government has been the implementation of the (Un) Affordable Care Act (ACA). The technology issues were in the spotlight, but there were also issues with consumers getting kicked off their plans unexpectedly; and concerns whether enough young people will sign up; a necessity to make the ACA viable.

With all of this going on, it still appears to us that the Federal Reserve will hold off on cutting back its asset purchases until after the New Year, when the new Fed chair will be installed. However, there is small chance that they could move at their December meeting; leading to the possibility of increased volatility should Fed members start to prepare the market for such an occurrence.

This chart reflects extraordinary bullishness at extremes.


J. Brock Hamilton

December 2013