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7/27/2019 Tapering Untangled 15-08-13
1/19
Important disclosures can be found in the Disclosures AppendixAll rights reserved. Standard Chartered Bank 2013 research.standardchartered.com
Thomas Costerg +1 212 667 [email protected]
Daniel Tenengauzer+1 645 845 [email protected]
John Davies, +44 20 7885 7640
Sophii Weng +1 212 667 [email protected]
| Global Research | 15 August 2013
United States Tapering untangled
We expect QE to be tapered in September by USD 10bn, end in Q2-14; we see the first rate hike in Q3-15
Ourtaperingscenario depends on economic data, the Feds rhetoric, and the impact of the wealth effect
The risks to our call include weaker-than-expected growth and a shift in tone, with a new FOMC next year
Summary
We keep our tapering view unchanged after recent data and Federal Reserve (Fed)
bankers speeches. We still expect a reduction in the Feds quantitative easing (QE)
programme on 18 September, after the two-day Federal Open Market Committee
(FOMC) meeting. But the signals from both recent data and the Feds rhetoric are not
clear-cut: this is still a close call. We are changing our view about what we believe
the Fed will cut first. Rather than being evenly split between mortgage-backed
securities (MBS) and US Treasuries (USTs), we now think the first cut, which we
forecast to be USD 10bn, will be USTs only. We see subsequent cuts of
USD 10-15bn at each meeting, including meetings without press conferences. We
think the Fed will start cutting MBS in January 2014, and the QE programme looks
set to end by mid-2014, when the unemployment rate drops below 7%, in line with
Chairman Bernankes guidance in June. But the 7% threshold is soft; key is that
tapering will be gradual.
Once tapering has started, the focus will be on the next step of the Feds QE exit
plan. We expect the Fed to continue reinvesting maturing securities in the QE
programme for several quarters, something it is l ikely to increasingly emphasise in itscommunication. With further improvement in the economy, especially narrower output
and labour-market gaps, we see the Fed stopping these reinvestments from
Q1-2015, six months before the first rate hike, which we still forecast by Q3-2015. In
June, the Fed indicated that it will keep its MBS portfolio to maturity; we think it will
confirm this when it updates its exit strategy principles.
In this piece, we lay out the three factors which determine our tapering call: the data,
the Feds rhetoric, and the wealth effect. Upcoming data releases regarding the
labour market, private consumption and the housing market will be central. The Fed
would like to see more signs that the economy is withstanding the current fiscal
consolidation, and that the fiscal tail-risk has been reduced. Whether payroll datamaintains a trend above 175,000, which seems likely for the rest of H2-2013, is also
key. Another parameter is whether the housing market has absorbed the steep rise in
mortgage rates since May. The average 30Y fixed mortgage rate rose 76bps in two
months to 4.42% on average in July. Although we foresee a dip in the housing data in
the coming months in reaction to this steep increase, we expect a rebound later in
the year as the economy gains traction, the labour market continues to improve, and
wage growth accelerates. We do not expect tapering to derail the continued housing
recovery. This will warrant a cut in MBS purchases from Q1-2014, in our view.
Figure 1: Standard Chartered US rates forecasts
Q3-2013 Q4-2013 Q4-2014 Q4-2015 Q4-2016
Fed funds target rate, % 0.0-0.25 0.0-0.25 0.0-0.25 0.75 1.75
5Y US Treasury yield, % 1.55 1.70 2.50 3.10 3.70
10Y US Treasury yield, % 2.75 2.90 3.75 4.00 4.25
Source: Standard Chartered Research
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On the Ground
15 August 2013 2
The Fed is changing its mix of tools, not the level of accommodation
A key uncertainty surrounding our call for September tapering is how the Fed will
reconcile a reduction in bond-buying with a likely downgrade of its 2013 growth
forecast. Even if Q2 growth is revised higher, the current Fed forecast of 2.3-2.6% y/yfor Q4-2013 growth (mid-point: 2.45%) implies growth north of 3.0% in H2, which
looks too optimistic. But we think the Fed can still argue that a sharp acceleration is
likely in 2014, with growth heading towards 3%. The new forecasts for 2016 are likely
to be upbeat as well. In other words, the outlook looks promising. Furthermore, the
inflation forecasts both for 2013 and 2014 are likely to stay broadly unchanged,
allowing tapering to proceed as the doves concerns about disinflation are addressed.
The second factor behind our tapering call is the Feds rhetoric. Since this spring it
has become clear that the Fed, including Chairman Bernanke, has become more
worried about the costs and risks of QE versus its benefits. Bernanke has signalled a
preference for conditional forward guidance, linked to a 6.5% unemployment rate,and separate from QE. The Fed will still provide the same level of accommodation,
but using a different mix of tools, as Bernanke emphasised at Julys congressional
testimony. Putting forward guidance in the drivers seat is also a way to keep market
expectations in check when tapering starts. Bernanke has reiterated the message
tapering is not tightening, which the market has gradually understood. Some doves
may argue that starting tapering now will prove that the exit of unconventional
policies is possible, and it can be smooth. QE remains relevant as a policy tool.
Bernanke, who has a theoretical bias towards the stock rather than flow approach to
policy accommodation, is expected to highlight the FOMCs decision taken in June to
keep the MBS portfolio to maturity as another way to provide accommodation.Bernanke is also likely to hint that the 6.5% unemployment rate threshold can be
lowered, as he said during Junes press conference.
Lowering the unemployment threshold would be a further way to send a dovish
signal, although we believe that in practice, the Fed is unlikely to change this
threshold in the short term. We see three main reasons: (1) This may create
confusion and affect the Feds credibility, as the current 6.5% target is quite recent;
(2) the FOMC will be reshuffled in 2014, and the Fed may want to avoid putting too
many ex-ante constraints on future members, and (3) lowering the threshold to 6%,
for instance, could mislead markets about the steepness of the rate-hiking path after
the first hike occurs. A 6% rate is close maybe too close to the full-employmentrate, which the Fed sees between 5.2% and 6.0%, a level which would in theory
warrant a neutral policy rate of around 4%.
The annual Jackson Hole meeting, on 22-24 August this year, usually provides the
Fed a platform for additional insight into its rhetoric, but this year the meeting may not
be as important as in the past. Bernanke does not plan to attend, while Vice
Chairman Yellen will only moderate a panel discussion, so there is no keynote
speech setting the tone for policy change.
A third factor for our tapering call is the level of asset prices, which plays an
important role via confidence and the wealth effect. One of QEs goals was areflation of assets following the global financial crisis, especially housing, specifically
through agency debt and MBS purchases. Our own index of the wealth effect shows
that in nominal terms, the level of wealth is back to pre-crisis levels, although house
September taper ing wi l l coincide
with a likely downgrade of the Feds
2013 growth forecast
The Feds rhetoric has evolved: QE
is losing i ts sh ine within the FOMC;
forward gu idance is preferred
Chairman Bernanke wi l l l ikely re-
emphasise tapering is not
tightening
Jackson Hole wi l l be no Delphi this
year
The weal th effect has worked, a
fur ther reason to expect QE
taper ing soon
We bel ieve the Fed is un l ikely to
change the 6.5% unemploym ent
threshold soo n
7/27/2019 Tapering Untangled 15-08-13
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On the Ground
15 August 2013 3
prices are still lower. The Fed can now argue that there has been much progress in
this area, another reason to slow the QE programme.
Our prism for analysing QE taperingWe expect the first reduction in QE to happen in September (although this is still a
close call). We lay out below the three parameters that we believe will dictate the
timing and subsequent pace of QE reduction:
1. The data is key
The Fed has highlighted that it will take a holistic view of the data before tapering,
and the FOMC is at loggerheads about what constitutes enough improvement in the
economy. Still, we believe data on the labour and housing markets is particularly
important for the tapering outlook. We think there will be a steady acceleration in
growth, which supports a steady tapering path until Q2-2014, when QE is likely to
terminate.
In recent months, the Fed has emphasised its concern about the continued
undershooting of its employment mandate, which probably explains why it has tied its
policies more explicitly to the unemployment rate. Now, both the QE programme and
the forward guidance on rates have explicit unemployment-rate thresholds at 7.0%
and 6.5% respectively, although the 7.0% threshold was only given verbally by
Bernanke, and is probably softer than the 6.5% threshold, agreed by the FOMC.
The labour market is particularly central, especially for the first reduction in
purchases, in our view. Although the Fed scrutinises the unemployment rate, it is
aware that it can fluctuate based on the participation rate. Still, the unemploymentrate is a concept that the general public readily understands. The Fed is monitoring
monthly payrolls closely, we believe, as it is a more precise gauge of labour-market
dynamics than the monthly unemployment rate. In his recent statements, Chairman
Bernanke has made frequent references to the six-month average in private payrolls:
this average has been broadly constant at around 200,000 over the past few months.
The key level the Fed watches, in our view, is whether payroll additions can sustain a
level between at least 175,000 to 200,000 per month, which is broadly consistent
with reaching the 7.0% unemployment target rate by mid-2014. It seems that the Fed
assumes a constant participation rate from now on, as several regional Fed
Figure 2: Inflation may have bottomed out
Select inflation measures, % y/y
Figure 3: Market-based expectations have rebounded
Feds 5-year 5-year breakeven inflation rate, %
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
Core CPI
1.7
Core PCE
1.2
Trimmedmean PCE
1.3
0.5
1.0
1.5
2.0
2.5
3.0
Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13
The Fed is biased towards i ts
employm ent mandate as i t sees
inf lat ion gradual ly picking up
The Fed monitors th e level of
month ly payro l ls , on a moving
average basis
Key is whether payrol l addi t ions
remain ab ove 175,000
Labou r-market and housin g data
wi l l remain key
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On the Ground
15 August 2013 4
researchers have shown. Fed Presidents Dennis Lockhart and Charles Evans have
recently cited these ranges in payrolls as key levels the Fed is scrutinising.
The payroll trend is likely to stay within the 175,000 to 200,000 range throughout H2on average, in our view, giving the green light to further reductions in QE. As an
aside, payrolls de-coupled to some degree from actual GDP growth in H1-2013, and
we expect both series to re-align in H2, with stronger growth but a slightly more
moderate level for payrolls. Both should accelerate in sync next year as growth
heads towards 3%.
Another area of focus is the housing market, which continues to post solid
performance, despite the recent rise in mortgage rates. According to Bankrate levels,
the average 30Y fixed mortgage rate moved from 3.66% in May to 4.42% on average
in July, a 76bps increase in two months. This comes as new homes sales for June
rose to the highest level since May 2008, while median prices were up 7.4%. Pricesfor existing homes were up 12.1% in May according to the Case-Shiller index.
Housebuilder confidence rose in August to the highest level since 2005.
This said, high-frequency data such as mortgage applications has dropped in recent
weeks, indicating that the rise in interest rates may have put off some purchasers.
But the overall trend in the housing market remains solid, something Chicago Fed
President Charles Evans acknowledged on 6 August when he said that higher rates
had not been as harmful as the Fed had feared. St Louis Fed President James
Bullard said that mortgage rates remained historically low despite their recent pick
up. Meanwhile, the level of foreclosures is on a continued downtrend, while banks
show both easier financing conditions and stronger demand for mortgages, as the
July 2013 Loan Officer Survey showed. Asset reflation is a significant part of QEs
goal and we think this dimension has been successful (see section 3).
Another area of scrutiny is how consumer spending evolves in the face of the fiscal
headwinds. Q2 GDP was up 1.7% q/q in the preliminary release, with private
consumption up 1.8%, down from 2.3% in Q1, but still a resilient performance given
the amount of fiscal tightening in the first half of the year. Key for the Fed tapering
outlook will be whether the Fed can be reassured that most of the fiscal headwinds
are going to dissipate, and that the fiscal tail risks are reduced.
Figure 4: Builders are enthusiastic, despite higher rates
NAHB survey (home builders) and new home sales, 000s
Figure 5: House prices are recovering from low levels
FHFA and Case-Shiller house price indices
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
New homesales, LHS
836
NAHB survey,RHS
59
0
20
40
60
80
0
500
1,000
1,500
2,000
2,500
Aug-04 Aug-06 Aug-08 Aug-10 Aug-12
Case-Shiller20, LHS
FHFA index(purchase),
RHS
180
190
200
210
220
230
120
140
160
180
200
220
Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12
The housing m arket is also in focus
as i t is seen as a major engine of
the recovery
The Fed wo uld l ike to see the US on
the other side of th e f iscal
cons ol idat ion hi l l
Our expectat ion is for the trend inpayrol ls to remain abov e 175,000
throughout H2
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On the Ground
15 August 2013 5
Julys retail sales report showed that consumption was indeed resilient , with the
headline reading up 4.0% 3m/3m on a seasonally adjusted annualised rate (SAAR)
and up 5.4% y/y SA. We note that the Fed will have seen the August retail sales
report before the 17-18 September meeting, and with July and August data in hand, itwill have a good indication of how Q3 private consumption may be performing.
There are a number of important fiscal deadlines in October-November: (1) the new
fiscal year starting in October, which still has to be funded by a continuing resolution
bill, and (2) the debt-ceiling limit, probably reached sometime in November, which
needs to be raised. Congress is still at loggerheads over both issues, which is raising
anxiety as the deadlines approach. The Fed may want to wait to gauge the impact of
these events; but we think it may want to signal its independence from Congress by
proceeding with tapering. The Fed can still add to accommodation if risks materialise
down the road (and in the unlikely event of a debt default, it will probably need to do
more than QE).
Some FOMC members have recently highlighted the risks of low inflation. James
Bullard dissented from Junes decision due to these concerns; but the mention in
Julys meeting statement that low inflation is a risk the Fed is monitoring seemed to
have mollified him. The Fed has so far stopped short of announcing further
measures, such as explicitly setting a lower threshold for inflation as part of its
forward guidance.
Current low PCE inflation is not an obstacle for tapering, in our view. First, the CPI
measure is accelerating again: 2.0% y/y in July, up from 1.8% in June (core CPI
inflation was 1.7% y/y). Second, recent core PCE inflation prints were up slightly(1.2% y/y in June) after the revisions to GDP data. Third, the Fed can argue that the
current low PCE prints are transitory, while expectations are still well-anchored: the
Feds 5-year 5-year breakeven rate has rebounded since touching 2.33% on
20 June, trading above 2.60% since 31 July. Finally, it can argue that inflation is a
lagging indicator of economic activity, and growth is expected to continue to pick up.
2. The Feds rhetoric
Overall, we think that there is enough support from the core FOMC to taper,
although signals are still mixed.
Figure 6: The Feds balance sheet continues to increase
Split of Fed assets (in USD trn), and share of the total
Figure 7: Although it remains smaller than its peers
Selected central bank balance sheets as % of GDP
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
UST
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On the Ground
15 August 2013 6
It has become clear over the past few months that the Fed would like to reduce its
QE programme soon, while it focuses its policy on the forward guidance on rates.
This is the confluence of two underlying factors. First, the stance developed by some
hawks on the costs and risks of QE, both in terms of risks to future inflation, financialstability and the Feds own growing balance sheet, have increasingly become
mainstream. Even Chairman Bernanke is showing increasing concern about the
risks to financial stability.
Second, the continual improvement in the data, despite headline growth remaining
below historical standards, has led some centrists to believe that the Fed can ease
off the QE pedal for now. In other words, monetary support is not as necessary as in
the past, as the recovery is strengthening and becoming more solid. The June FOMC
statement specifically mentioned that the downside risks had diminished since
September 2012, when the current QE programme began. Some centrists may also
believe that by reducing QE now in a smooth and orderly manner, the Fed couldincrease QE again later if the economy disappointed; in other words, QE has not lost
its relevance as a tool.
An important rhetorical shift is that the Fed is now saying that there has been enough
accumulated stock ofprogress since September last year to start reducing the QE
programme, as highlighted in a speech by Fed Governor Jeremy Stein in June, who
is seen as close to the FOMCs centre of gravity . This is also a way to downplay the
importance of the data over the summer, and contrasts somewhat with other
messages from the Fed that emphasise the importance of seeing more economic
momentum before tapering, something Bernanke underscores.
Some of the uncertainty about September tapering stems from the fact that its start
would coincide with the release of the updated FOMC forecasts, which are likely to
show a downward revision to 2013s numbers given weak H1 growth. But this is not
necessarily a barrier for the Fed, as we think it will probably argue that the outlook for
2014 still looks solid. This is confirmed by consensus forecasts, which consistently
show 2014 growth at 2.7% (also our forecast), a level unchanged for several months.
The downward revisions to 2013 have not affected 2014. Full-year growth of 2.7%
implies growth heading towards 3% in the coming quarters, broadly in line with the
Feds own forecasts. The Fed can therefore argue that it is confident in stronger
growth ahead, and that this is backstopped by the markets view, giving the green
light for tapering.
Figure 8: Markets still expect 2.7% US growth next year
Evolution of Bloomberg consensus forecast for GDP growth
Figure 9: The S&P is up c. 150% since its 2009 trough
S&P 500 equity index
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
2013
1.6
2014
2.7
1.0
1.5
2.0
2.5
3.0
3.5
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13
600
800
1,000
1,200
1,400
1,600
1,800
Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13
The centr ists have noted the
diminish ed effect iveness of the QE
pol icy
Var ious members have noted that
enough progress has b een m ade,
al though th e short- term signals are
st i l l mixed
Some FOMC members have
highl igh ted that enoug h progress
has been made
The Fed can argue that the ou t look
for 2014 looks p romising , with
growth w idely expected to
accelerate stron gly
Time forecast was made
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On the Ground
15 August 2013 7
3. Asset-price reflation
An important role of the various QE programmes conducted since the eruption of the
global financial crisis in 2008-09 has been to reflate asset prices, both directly by
lowering borrowing costs and indirectly by boosting confidence. Stock markets, andfinancial assets more generally, have shown strong improvement since 2009. The
S&P 500, for instance, is up c. 150% since March 2009, its post-crisis low.
But houses rather than stocks are the most important assets for average Americans.
Most surveys, for instance the 2010 Fed Survey of consumer finances, show that
stock ownership, and wealth more generally, is particularly biased towards the upper
echelons. How house prices perform, rather than stocks, is the key to how the wealth
effect works, and therefore to the outlook for private consumption.
The housing market was the main driver of the current recession, and is now the
main driver behind the recovery, with its fortunes spilling over to the broadereconomy. House prices are on a steep uptrend, as is residential house construction,
although levels are still low in absolute terms. The median existing-home price was
up 12.2% y/y in Q2, the biggest y/y increase since 2005, according to the National
Association of Realtors.
Housing wealth is key. We illustrate the wealth effect for an average American
household by building an index of 70% house prices (FHFA house price index), 10%
a cash index (Barclays 3M USD LIBOR cash index), 10% a stock index (S&P 500
index), and 10% a bond index (Bloomberg Bond index: Treasuries over 1Y, total
return). This index is, on a nominal basis, back to its pre-crisis highs.
The gains in asset prices have been so strong that fears have grown, especially
within the hawkish camp, that Fed policy may be causing bubbles to form in some
segments, particularly financial markets. Earlier this month, Dallas Fed President
Richard Fisher warned of complacency, saying that markets need to be weaned off
the Fed put. Earlier this year, Fed Governor Jeremy Stein warned of the excesses in
some financial markets. The Fed is likely to argue that regulatory policy, not rate
policy, is the primary way to address concerns about potential bubbles. Given the
improvement in the housing market, though, it is probably more difficult for the Fed to
argue that it needs as much stimulation as in the past.
Figure 10: The middle class is back to breakevenNominal terms; simplified index representing the wealth effect
for a typical median household, rebased August 2006=100
Figure 11: The Fed is worried about the spreadSpread between the 30Y avg. mortgage rate (Bankrate) and
the 30Y US Treasury yield
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
90
92
94
96
98
100
102
104
Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12
Index composition:70% FHFA house price index10% Barclays 3M USD LIBOR cash index10% Bloomberg UST 1Y+, total return10% S&P 500 equity index Bankrate 30Y
mortgage rate(nat. avg.)
UST 30Y
Spread, bps(RHS)
0
50
100
150
200
250
300
350
400
0
1
2
3
4
5
6
7
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
A key goal of the var ious QE
programmes was to boo st asset
pr ices
Houses are key for the m iddle class
Housing is rebound ing, benef i t t ing
the rest of the econom y
The Fed can argue that enoug h
impetus has been given
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On the Ground
15 August 2013 8
Key in the short term is whether the housing market can withstand the increase in
mortgage rates since May 2013, which coincided with the sell-off in USTs driven by
fears of QE tapering and new expectations for the first rate hike. The mortgage-rate
rise may take some time to feed through to the data. We believe that concerns aboutthe housing market will probably keep the MBS side of the QE programme as it is.
This is why we think the Feds initial QE reduction will be of USTs only.
Although it may stumble a bit in the next few months, we believe that the housing
market will be able to withstand the increase in rates as the economy continues to
improve, the unemployment rate drops, and wages pick up. Residential construction
and other housing-related services should continue to boost GDP growth significantly
mediumterm and next year. A solid housing market, and a pickup in lending and
increased business investment, are the factors behind our expectation of above-
potential growth next year.
Figure 12: HY bond spreads are on a tightening trend
Bond spreads, in bps: US high-yield and investment grade
Figure 13: Mortgage refinancing has dropped recently
MBA mortgage activity: purchases vs. refinancing (indexes)
Source: Bloomberg, Standard Chartered Research (based on the spread of the respective
FINRA indices to the 5Y UST yield)
Source: Bloomberg, Standard Chartered Research
High yield
Inv. grade0
500
1,000
1,500
2,000
2,500
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Spreadwidening
Refinancing,LHS
Housepurchases,
RHS
0
50
100
150
200
250
300
350
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13
Short- term, the Fed probably w ants
to see the impact of the recent r ise
in mo rtgage rates
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15 August 2013 9
Box 1. How big is the Fed in the UST and MBS markets?
The Fed is now a major player in the UST and MBS market, but we do not think the point of saturation has been reached.
Issues about market functioning and liquidity are surely a concern for many FOMC members. Some, particularly in thehawkish camp, have warned of potential market disruptions due to the Feds ongoing purchases. But we think these issues
are not the primary driver of the Feds decision to taper. Furthermore, we think that QE has not lost its relevance as a policy
tool. Restarting QE remains an option should the economy weaken significantly. Liquidity issues would not be a barrier, and
there would still be ample room to buy.
The duration of the UST portfolio is longer than for MBS holdings. This is important as once the Fed stops reinvesting (see
discussion below) in Q1-2015 as we expect, the MBS will mature first. According to the QE portfolios 2012 annual report,
61% of the USTs in its portfolio had maturities of six years or longer as of end-2012, partly a result of the previous Maturity
Extension Programme, also known as Operation Twist (September 2011 -December 2012). The weighted-average maturity
of the UST portfolio was c. 10.4 years; meanwhile, its duration was a bit more than eight years according to the report, or
twice that of the rest of the Treasury market. The Feds Q1 quarterly report mentioned that the estimated average remaininglife of its MBS portfolio, which factors in some scheduled payments and pre-payment assumptions, was c. 4.7 years, up from
3.3 years as of end-2012 (and up from 2.4 years as of end-2011). The duration of the MBS portfolio was c. 2.5 years as of
end-2012.
Even if we do not think the Fed has reached a point of saturation, there are still rising concerns among market participants
about the impact of the Feds purchases on market dynamics, particularly on liquidity and the availability of collateral. Som e
have also noted that the Treasury supply is shrinking rapidly as a result of the sharp decline in the deficit. These themes are
regularly discussed at meetings of the Treasury Borrowing Advisory Committee, a panel of primary dealers advising the
Treasury. The Fed, in particular the New York Fed in charge of the actual implementation of the purchases, downplays these
concerns.
In a 27 March speech, the New York Feds Simon Potter highlighted there seems to be little evidence that the current pace
of purchases is prompting deterioration in market liquidity or straining the markets ability to deliver securities. The Fed has
policies in place to limit its concentration in some securities. For instance the Fed cannot own more than 70% of the
outstanding stock of a specific Treasury bond. The Fed also slows purchases of a specific bond when it breaches 30% of
ownership. Furthermore, the Fed lends securities to the market to increase the availability of collateral.
As of end-2012, the Fed said it owned 19% of outstanding fixed-rate agency MBS. Looking at the Feds balance sheet as of
end-July, the Feds total MBS portfolio was USD 1.57tn, compared with total outstanding MBS debt of 8.15tn, according to
Securities Industry and Financial Markets Association (SIFMA) data. In other words, the Fed owned 19.3% of the total.
According to statistics mentioned by Potter, the Fed owns less than 20% of coupon Treasuries outstanding, but this ratio
increases for longer-term paper: it is 35% for paper of four years and more, and 41% for 30Y paper issued since 2009. On aflow basis, it purchases about 25% of monthly gross issuance of coupon securities. However, on a net basis, the picture
appears more stretched, especially considering recent statistics: in Q2, the Treasury issued USD 210 of coupon paper on a
net basis, which meant that the Fed bought 64% of net issuance. As far as the MBS market is concerned, the Fed buys c.
50% of gross issuance on average, as per the numbers in Simon Potters speech. However, the supply of MBS is highly
volatile due to the impact of refinancing activity.
Even though the Fed barely mentions the supply picture, particularly for Treasuries, it is clear that the unfavourable trend of
the supply-demand equation due to the shrinking deficit does pose some dilemmas to the Fed. All things equal, the Fed is
buying more Treasuries as a share of total supply given shrinking debt issuance. Some in the market may argue that by
keeping bond-buying constant, the Fed is actually providing more accommodation; but we think the Fed has more a balance-
sheet, rather than flow, perspective on the impact of the QE programme. The Fed also can argue than it is buying from thesecondary market, not directly from the Treasury, and the UST stock remains sizeable despite shrinking flows recently.
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The background of the tapering story
The Fed has clearly signalled that QE tapering will happen soon
Over the past few months, the Fed has signalled its intention to reduce its
bond-buying programme in the second half of the year, although it has remained
vague about the exact timing. The official Fed view, which Chairman Bernanke
reiterated in his June congressional testimony, is that a reduction in the Feds bond
purchases should happen later this year, and it will depend on the data.
A few FOMC members have recently hinted that the question would be on the
agenda at Septembers FOMC meeting, including Atlanta Fed President Dennis
Lockhart and Chicago Fed President Charles Evans, who said that tapering could be
potentially announced by then, depending on economic data in the meantime.
At Junes testimony, Bernanke emphasised that a reduction in QE would be tied to
the Feds own scenario of a pick-up in growth and acceleration in inflation, although it
remained unclear how the Fed will reconcile actual data and forward-looking
expectations, and the degree of acceleration expected. An interesting characteristic
of the Feds communication is that a numerical threshold has been set for QEs end,
but not for the start of the reduction. Indeed, in June, Chairman Bernanke said that
QE would be terminated by mid-2014, when the unemployment rate is expected to
breach 7.0%. But the criteria for the first cut to the QE programme remains vague, as
it depends on the outlook for the labor market and inflation.
Overall, this leads us to believe that the bar for tapering is lower than the bar for
ending the QE programme. The Fed will continue to look at the data very closely over
the next few months, and it will emphasise that in principle, tapering is not a pre-set
course (although we think that in practice, it is likely to be).
The Fed has hinted that tapering will be a gradual process. Therefore, the reduction
has to start soon not to be too abrupt, especially as the unemployment rate has been
on a steep downtrend in recent months: in July, it was 7.4%, down 0.5ppts from
Januarys level. The main risk to the Feds forecast of reaching 7 .0% by mid-2014 is
that it could happen earlier if the labour-force participation rate continues on its
current downtrend. This said, the 7% target is a soft target, in our view. We think that
the Fed would continue to taper gradually even if the 7% rate were breached earlier
than in Q2-2014: the Fed would just change this indicative target.
Figure 14: UST redemptions are biased towards after 2016
Redemption schedule of the Feds UST portfolio (USD bn)
Figure 15: Meanwhile, net issuance shows a downtrend
Projected net UST borrowing, USD bn (2Y-30Y paper)
Sources: Fed, Standard Chartered Research Sources: TBAC, Standard Chartered Research (NB: assumes constant future issuance)
0
50100
150
200
250
300
350
400
450
2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035
2036 and later
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2009 2011 2013 2015 2017 2019 2021 2023
QE taper ing is no w more a matter of
execut ion than comm unicat ion, as i thas b een wel l telegraphed
Several FOMC participan ts have
argued that taper ing could h appen
as soon as September
There is no clear guidance on the
thresholds fo r the f i rst cut topurchases; it is clearer for QEs end
Taper ing l ikely to star t soo n as the
unemp loyment rate is on a
down trend, heading towards 7%
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The tapering process will also be affected by the FOMCs politics
Another interesting fact is that the minutes of the June meeting show no concrete
mention of the hard thresholds of 7 .00% and mid-2014, although Bernanke hinted
that there was broad agreement before he named these at Julys press conference(he said he had been deputised by the FOMC). The June meeting minutes showed
that half of the FOMC participants, which includes non-voters, expected QE to end
before end-2013, while the other half saw an end in 2014. But overall the minutes
showed that most members were still in wait and see mode, and wanted to see
more data about the economy before tapering. The minutes of Julys mee ting will be
released on 21 August and could shed more light on this debate.
Key for the pace of tapering is the FOMCs politics, particularly going into next year.
Chairman Bernankes term ends in January 2014, and he is widely expected to step
down from the FOMC. His replacement is not expected to be announced before the
fall; the main contenders are Vice Chairman Janet Yellen and former TreasurySecretary Lawrence Summers, both seen as dovish (Yellen probably a touch more
than Summers), but the succession remains open to others, including outsiders. It is
worth noting that should Larry Summers be the new Chairman, he may be seen less
in the continuity of the current FOMC than Janet Yellen.
Beyond the Chairmanship, the FOMC is undergoing a wide reshuffle, with the
departure of Governors Elizabeth Duke and Sarah Raskin, and the end of Jerome
Powells mandate in early 2014. Their replacements have yet to be announced.
Cleveland Fed President Sandra Pianalto, a centrist, will also retire, with a
replacement expected to be announced by early 2014. The Cleveland Fed has voting
power next year.
Furthermore, the voting pattern will change in January as part of the annual rotation
among regional Fed presidents, which will be biased towards the hawkish members.
Philadelphia Fed President Charles Plosser and Dallas Fed President Richard
Fisher, who have been quite vocal over the past months, will get voting power.
However, this may be diluted by the fact that Minneapolis Fed President
Kocherlakota will also get voting power. Kocherlakota has expressed strong dovish
views in recent months, especially by insisting on lowering the 6.5% unemployment
threshold, something that Bernanke mentioned as a possibility in June.
Figure 16: The unemployment rate is drifting towards 7%
Unemployment rate, %
Figure 17: The trend in payrolls is solid despite a July blip
Gains in private payrolls, 000s (and six-month average)
Source: Bloomberg, Standard Chartered Research Source: Bloomberg, Standard Chartered Research
7.4
4
5
6
7
8
9
10
11
Feb-04 Feb-06 Feb-08 Feb-10 Feb-12
Threshold for theend of QE: 7.0%
First rate hike: 6.5%
161
6-month avg.
201
-100
-50
0
50
100
150
200
250
300
350
Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
The FOMC awaits more signs that
the economy can withstand less
accommodat ion
The subsequent pace of taper ing,
partic ularly in 2014, may b e affected
by how FOMC pol i t ics evolves
The FOMC wi l l have a more hawkish
bias from Janu ary 2014, at least
given the rotat ion among regional
Fed presidents
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September tapering: We expect a USD 10bn initial reduction in USTs only
Tapering, and the amount of tapering, will probably be a compromise between the
different camps on the FOMC. With doubts about the efficacy of the QE programme,
the hawks have long argued that tapering should have started already. Many in thedovish camp believe that more data is needed before tapering to ensure that the
economy can withstand the smaller stimulus, but some may also argue that starting
now is a good way to prove that that QE exit can be smooth, with the view that QE
remains relevant as a monetary policy tool.
In terms of how to split tapering MBS and USTs, many hawks have argued that the
Fed should start with MBS, as the Fed has done enough to stimulate the mortgage
market, and that the return to health of the housing market, coupled with the stronger
sentiment in banking and financial markets, warrants more private-sector
involvement in this market. Many doves argue that MBS buying has been the most
efficacious way to stimulate the economy compared with UST buying, and that theFed should cut on USTs first, while keeping MBS.
We expect the FOMC to start tapering by a relatively small amount of USD 10bn,
leaving QE at USD 75bn per month after the Septembers meeting. This is also the
consensus of a Bloomberg poll released on 13 August (two-thirds of the 48
economists polled expect a September tapering). While sending a message that the
Fed is resolved to taper, and that it is delivering on its promise to start tapering in H2-
2013, the Fed could still argue that the initial reduction is minimal. Even after the
reduction, the Fed is providing ample accommodation; i.e. it is still buying bonds and
adding to its balance sheet.
Septembers press conference provides a framework for the Fed to give its rationale,
and clarify the path for subsequent cuts. In our view, the Fed will cut by USD 10-15bn
at each FOMC meeting until June 2014, including at meetings where there is no
press conference. In other words, although the Fed will emphasise that tapering is
not systematic, in practice it is likely to be .
The Fed added Treasury purchases to QE3 at its December 2012 meeting, and we
think this is what it will start to cut at Septembers meeting. The Fed noted in its July
meeting statement, that mortgage rates were higher, a hint that it is concerned about
not derailing the mortgage market. This said, recent Fed speakers have noted that
Figure 18: A stronger recovery after Julys GDP revision
US GDP, rebased Q1-2008=100
Figure 19: A stronger recovery in US compared with peers
GDP, rebased Q1-2008=100
Source: Datastream, Standard Chartered Research Source: Datastream, Standard Chartered Research
Pre-revision
Post Julyrevision
94
96
98
100
102
104
106
Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013
Euro area
UK
US
Japan
90
92
94
96
98
100
102
104
106
Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013
Taper ing wi l l probably be a
com prom ise between the var ious
camps o n the FOMC
The doves wo uld prefer to cut USTs
fi rst as MBS pu rchases are seen as
more eff icacious
The fi rst cut shou ld be relat ively
smal l : w e expect USD 10bn
The press con ference wi l l help
clar i fy the subsequent taper ing p ath
The Fed is l ikely to cut MBS
purch ases later due to ongoing
concerns about the hous ing market
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the housing market has been resilient so far, including over the summer. But we think
that the Feds prudence about the housing market may lead to a delay in cutting
MBS, in particular as the impact of higher mortgage rates is gradually feeding
through to the data.
Most of the increase in mortgage rates was directly linked to the increase in
long-term rates, but the Fed may be concerned about adding to de facto tightening,
with a potential increase in the rate spread if the Fed withdraws MBS buying too
quickly. Given the current centre of gravity on the FOMC, we think the doves have
the upper hand, and that they may indeed choose to cut USTs first, while they await
more data about housing, and then start to cut MBS as well, probably next year.
Heading towards the exit: Next steps
Focus will turn to the QE reinvestment policy, then the first rate hike
Once QE tapering starts, the markets focus will probably shift to the timing of QEs
end, which we forecast to be in Q2-2014. As we enter 2014, and QEs end
approaches, attention will probably turn to the next step in the exit process: the
decision to stop reinvesting maturing bonds. This would lead to a smaller Fed
balance sheet, which would be widely seen as a signal of the first policy tightening.
We see the reinvestment policy ending by Q1-2015, approximately six months before
the first rate hike (Q3-2015, in our view). Although not many bonds will actually
mature in the immediate aftermath of the decision, as most USTs start to mature
from 2016, the decision would still send the signal that the Fed is ready to hike. Once
it stops reinvesting, we think it will stop reinvesting all maturing securities, USTs and
MBS. The MBS holdings will start to shrink first. Overall, we think the balance sheet
would decrease by 5-6% in the twelve months after the decision; i.e., it will be a very
gradual reduction.
The Fed wants the exit to be smooth, and we think that the Fed will go for a step-by-
step approach once it has terminated its bond purchases. We think that the
reinvestment policy will move higher on the Feds communication agenda in the
coming months as the Fed tapers, highlighting that balance-sheet shrinkage remains
distant, even after the end of the QE programme. By highlighting that the end of the
reinvestment process is not imminent, the Fed will reinforce its message that
tapering is not tightening; and that it could increase QE again if necessary.
When the time comes to increase rates, we expect the interest rate on excess
reserves (IOER) to play an increasingly important role. Given the size of the excess
reserves at the Fed, it is likely that the Fed funds target rate (FFTR) could take a
backseat as a policy tool; the IOER will be in the drivers seat. The Fed is indeed
likely to steer interbank market rates by moving the IOER.
Meanwhile, the Fed is likely to complement its action on the rate side by reserve-
draining operations such as reverse repos, and term deposits. The Fed has already
tested this framework to make sure it is ready when the time comes. This said, we do
not think the reverse repos will play a major role in the Feds policy, although the Fed
is likely to emphasise its ability to conduct these operations as a way to quell fears
about the possible inflationary consequences of having such large excess reserves.
But there are limits to the Feds ability to repo , given the unprecedented size of
current excess reserves; again, the IOER will be key.
The doves st i l l have the upper hand
on th e FOMC
The next decis ion involves the
Feds QE reinvestment policy
Most USTs actual ly mature from
2016, as a result of Operation
Twist
The Fed wi l l l ikely insist on a
smooth ex i t path
Interest rate on excess reserves is
l ikely to take thedrivers seat
Reserve repos could com plement
the rate-hik ing p rocess
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Risks around our Fed scenario
We see three main risks around our forecast.
The economy may not accelerate as we expect, delaying tapering
First, the economy may be weaker than expected in the coming months, which could
delay tapering, or even lead to increased QE if the downturn is sizeable. This might
result, for instance, from a drop in market and business confidence should the
political deadlock in Congress continue over the coming months. At worst, there
could be a government shutdown on 1 October if politicians fail to agree on a new
spending bill (continuing resolution). This seems unlikely to us, but it is still not
completely impossible: it happened in the 1990s.
A last-minute increase in the debt ceiling could also affect confidence; an actual debt
default seems improbable. The risk is also that politicians decide on a bigger cut to
government spending, and new taxes, which could result in stronger-than-expected
fiscal headwinds. Meanwhile, the Affordable Care Act, also referred to as
Obamacare, begins in January 2014. Some portions, for instance mandatory
coverage by firms, have been postponed by a year; but the mandatory coverage by
individuals is set to move ahead, and this could have a bigger-than-expected impact
on household confidence and could weigh on purchasing power.
There is also a risk that the de-facto domestic tightening observed since the spring,
particularly via higher mortgage rates, has had a bigger-than-expected impact on the
housing market and the economy. It is also possible that the global economy faces a
more prolonged period of softness, affecting global demand for US goods. But this
might bring a drop in commodity prices, which could be good news for domestic
commodity buyers (but not for US commodity and energy suppliers). A related risk is
a further inflation deceleration in the coming months. Although we think low PCE
inflation is unlikely to be a barrier for the first tapering decision, if it persisted, it could
delay further reductions as the FOMC waits for an uptick. Low inflation could also
affect the decision to hike the policy rate down the road.
By contrast, a faster acceleration in US growth compared to our forecast; for
instance, growth picking up to 3% in H2-2013, and heading above 3.5% in H1-2014,
would probably lead to a quicker tapering process. This would also probably mean
that the unemployment rate dropped faster than we expect (assuming the
participation rate is unchanged), which would warrant a first rate hike earlier than in
Q3-2015, and a steeper rate-hiking trend as the economy moves towards its
full potential.
The Fed may tweak its thresholds
A second possibility is a change in the Feds rhetoric. The Fed may backpedal on its
thresholds for QEs end, and Bernanke may tweak the current guidance of an
unemployment rate of 7% for ending the QE programme. Overall, we think the Fed
will prefer to tweak the guidance rather than the pace of tapering, which we think will
remain gradual. Still, there is limited leeway to the downside, as the potential next
step would be 6.5%, the threshold for the first rate hike. But lowering both thresholds
is still an option. It is important to emphasise that the 7% target is considerably
softer than the 6.5% target for the first hike, as the 7% target was simply mentioned
in a press conference, whereas the 6.5% threshold is in the official statement.
The economy may be weaker than
we expect: this would delay
taper ing; a mo re ser ious down turn
could tr igger an increase in QE
Var ious f iscal deadl ines wi l l
pun ctuate the second h al f of the
year
The degree to which th e housing
market wi l l be affected by higher
mo rtgage rates is st i l l unclear
A more pron ounc ed accelerat ion in
growth would lead to a quicker end
to the QE programm e
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Alternatively, the Fed may further refine its forward guidance, which has been a work
in progress since it was launched. It began as soft guidance; became calendar
guidance, itself tweaked twice; and then the Fed opted for threshold-based guidance.
As an aside, this option has also found traction overseas (e.g., with Governor Carneyat the Bank of England). We still think that the Feds current forward guidance linked
to the 6.5% unemployment rate is likely to be further refined, but we do not expect
any change before at least 2014 when the FOMC is reshuffled.
If the Fed decided to introduce a lower unemployment threshold, 6.0% instead of
6.5%, for instance, this might be seen as a dovish decision; i.e. accommodation for
longer as the new target may be reached several months later. But the impact on
rates could be mixed, as the Feds credibility could be affected, and the term
premium could increase. It is also possible that the market may infer a steeper rate-
hiking cycle if the Fed does not, in tandem, anchor expectations about the path of
subsequent rate hikes. The market may also price in the risk of future inflation.
If the Fed complemented its guidance with an inflation floor, this would probably take
the format of inflation at the 18- to 24-month horizon staying above a certain
threshold; for instance, 1.5%. In practice, this would have limited impact: the Feds
inflation forecast traditionally tends to be mean-reverting towards its 2% goal in the
medium term, so linking the two may assuage the concerns of those who believe that
the Fed does not pay attention to the second part of its mandate. But in practice it
would mean little in terms of the need to change policy (the labour market threshold
would still be the most important).
A different story would be to link policy to actual inflation; e.g., the y/y increase in
core PCE. But given the volatility of actual inflation, which does not necessarilyreflect the output gap, the Fed is very unlikely to use actual inflation rather than
inflations expectations as a guide. For instance, core PCE inflation climbed to 2.04%
y/y in March 2012, before falling back. It would be difficult to argue that the Fed
needed to tighten policy then.
Rhetoric may change due to the new leadership in 2014
It is also possible that the new Fed Chairman may revamp the FOMCs rhetoric in
early 2014. The risk is even greater as several 2013 FOMC members will have left
the Board then (see discussion above). 2014 will bring a lot of fresh blood to the
FOMC. Although they are likely to keep the overall framework of the previous FOMC,
there could be some subtle tweaks to policy, or the theoretical framework may bechanged; e.g. its perception of the output gap, the growth potential, or underlying
inflation. The new FOMC may put greater emphasis on one dimension of its mandate.
For instance, there may be more emphasis on inflation than currently is the case, or
more on financial stability. Some new members will be more in line with the current
FOMC than others.
Bottom line
New challenges are appearing as the Fed opens a new chapter of its QE
programme. Communication will have to be calibrated carefully to avoid a
disconnection between markets and the Feds thinking, and therefore avoid a
disorderly outcome. The two main risks are markets getting carried away ahead of
Fed action; or Fed action chasing the markets. In July, Bernanke hinted that the
market and the Fed were on the same page. QE tapering is only one stop on the
Fed's journey to QE exit. The risk is that there are more potholes along the way than
factored into our current forecast.
A lower unemployment threshold
would be seen as dovish at f i rst
glance; but the m arket react ion
could be more comp l icated
There is a r isk that the Fed may
ref ine i ts forward guidance
A Fed labour-market threshold may
com e with an inf lat ion f loor , but this
is unl ikely to affect pol icy
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AppendixThe Feds exit strategy
Figure 20: Timeline of the key Feds monetary-policy measures since the global financial crisis
Timeline Main events
25 November 2008Target rate cut to 0.0-0.25%
QE1 announced: Fed intends to purchase USD 100bn in agency debt and up to USD 500bn in MBS.
16 December 2008Fed hints it could start buying USTs.
Soft forward guidance introduced: The FOMC expects an exceptionally low FFTR for an extended period.
18 March 2009QE expanded, UST buying started. Total MBS target raised to USD 1.25trn, agency debt target up to USD200bn. Adds USD 300bn target for USTs, for the following six-month period.
23 September 2009 The FOMC slows the pace of MBS purchases, plans end by Q1-2010.
10 August 2010 Maturing bonds to be reinvested in USTs to avoid balance-sheet shrinkage.
27 August 2010 Chairman Bernanke hints at QE2 at Jackson Hole meeting.
3 November 2010 QE2 starts. UST buying target of 600bn (USD 75bn/month) by end Q2-2011.
9 August 2011 Calendar forward guidance introduced. Fed funds rate to stay at a floor until at least mid-2013.
21 September 2011 Operation Twist announced. Fed sells USTs with maturity below 3Y, invests into bonds with maturity of 6-30Y.
25 January 2012Calendar guidance refined again, promise to keeprates to stay low untillate 2014, from mid-2013 prior.
Fed releases long-term economic projections, clarifies its inflation target is 2%.
20 June 2012 Operation Twist extended until year-end.
31 August 2012 Chairman Bernanke hints at QE3.
13 September 2012QE infinity (QE3): open-ended purchases of MBS, USD 40bn per month.
Time guidance refined further: FFTR to stay low until at least mid-2015, from late-2014 prior.
12 December 2012Shift from time guidance to conditional, threshold-based guidance: threshold of 6.5% unemployment rate(as long as inflation stays below 2.5%).
Fed adds UST purchases (USD 45bn/month) on top of MBS purchases (USD 40bn/month).
22 May 2013 Chairman Bernanke hints the Fed could start reducing its bond purchases within the next few meetings.
19 June 2013Chairman Bernanke hints that QE could end by mid-2014 , when the unemployment rate drops to 7%.
Bernanke hints that the Fed may keep MBS until maturity, rather than actively sell, as part of the exit.
Source: Fed, Standard Chartered Research
Figure 21: How the Fed said it would sequence a QE exit, and our forecast for the timeline
The Fed said in June that it would keep MBS to maturity, rather than sell actively as part of the exit, as previously contemplated.The Fed has not yet released an updated exit strategy.
Expected timeline Event
September 2014
QE tapering starts.
We think the Fed will reduce USTs first (cut by USD 10bn to USD 35bn), keep MBS unchanged at USD 40bn. Wethen see a 10-15bn reduction in purchases at each subsequent meeting (including meetings with no pressconference), with a bias towards USTs throughout 2013, and a cuts to MBS from early 2014.
Q2-2014 The QE programme ends; i.e., the Fed stops buying bonds.
Q1-2015The Fed stops reinvesting maturing MBS and USTs. The Fed signals it is ready to hike rates in comingmonths if the economy and the labour market continue to improve. There is no significant UST redemption before2016 as a result of Operation Twist.
Q3-2015First rate hike, after the unemployment rate breaches 6.5%. The Fed steers the fed funds rate with theinterest rate on excess reserves. This is combined with reserve-draining operations.
2015 onwardsRate hikes continue (we expect 25bps incremental increase per quarter until neutral level of 4.5% by 2019). Noasset sales for several years, the overall portfolio erodes gradually as bonds mature and are not reinvested.
Source: Bloomberg, Fed, Standard Chartered Research
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Selected recent Fed speeches
Figure 22: Fed speakers have mentioned the possibility that the Fed could taper in September
Fed speaker Key excerpts
Richard Fisher
Dallas Fed President
(voter in 2014), hawk
When the right time comes, we must carefully remove the programs pole pin and gingerly unwind it so
as not to prompt market havoc. The FOMC should socialise the idea of the inevitability of our dialling
back and eventually ending our purchases. At Julys meeting, I suggested that we should gird our
loins to make our first move this fall.
Financial markets have become too accustomed to the Feds put.
Q&A after speech in Portland, Oregon, 5 August 2013
Dennis Lockhart
Atlanta Fed President
(voter in 2015), centrist with
hawkish bias
If we see a deterioration from this point and I would say my more realistic fear is just a kind of
ambiguous picture of mixed data that signal neither accelerating strength nor necessarily
deterioration, but that kind of moping along in the middle then I think its not a foregone conclusion
that the asset purchase program should be removed or removed rapidly.
Interview with Market News International, 6 August 2013
Charles Evans
Chicago Fed President
(voter this year), dove
We are quite likely to reduce the flow of purchases rate starting later this year. I couldn't tell you
exactly which month that will be. And it's likely to wind down over time in a couple or few stages.
I would clearly not rule out a September tapering.
Conference with reporters, Chicago, 7 August 2013
Sandra Pianalto
Cleveland Fed President
(Cleveland Feds voting
turn is next year, but Pianalto is
retiring), centrist
If the labor market remains on the stronger path that it has followed since last fall, then I would be
prepared to scale back the monthly pace of asset purchases.This is not to say that the labor market is
fully recovered; it is not.
Speech in Cleveland, Ohio, 7 August 2013
James Bullard
St Louis Fed President
(voter this year), dove (recently)
Rising yields are a concern, but I think that the level of yields now is still quite low by historical
standards. I also think that momentum in housing is stronger than any effects that are going to come
from higher yields, at least for now.
The bubble issue is a very alive and very salient issue for the FOMC. I dont see a bubble of thatmagnitude right now. [referring to the tech bubble in the 1990s and the housing bubble of the 2000s]
I am still undecided on whether to back QE taper in September.
Q&A after speech in Louisville, Kentucky, 15 August 2013
Source: Bloomberg, Reuters, Market News International, Standard Chartered Research
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Dashboard
Percent of jobs recovered
(3)
Real GDP growth, y/y
(1) Illustration inspired by a Dallas Fed 2013 presentation; (2) spread of the FINRA US high-yield corporat e index (yield to maturity) to the UST 5Y yield, in percent; (3) total non-farm
payrol ls, as of the latest data, compared to trough versus peak;Sources: Bloomberg, Standard Chartered Research
US Economic Dashboard(1)
9.67
High-yield bond spread(2)
Unemployment rate Core PCE inflation, % y/y10.04.0
4.5
5.0
5.5
6.0
6.57.0
7.5
8.0
8.5
9.0
9.5
7.4
10.03.0
3.5
4.0
4.5
5.0
5.56.0 6.5 7.0
7.5
8.0
8.5
9.0
9.5
4.90
5.0-1.0
-0.5
0.0
0.5
1.0
1.52.0 2.5
3.0
3.5
4.0
4.5
1.20
6.0-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.52.0 2.5
3.0
3.5
4.0
4.5
5.0
5.5
1.40
7/27/2019 Tapering Untangled 15-08-13
19/19
On the Ground
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Document approved by
John CalverleyHead of Macroeconomic Research
Document is released at
22:15 GMT 15 August 2013