Member FINRA/SIPC Page 1 of 5 LPL FINANCIAL RESEARCH W eekly Economic Comme ntary December 16, 2013 John Canally, CFA Economist LPL Financial Taper, No Taper, or Somewhere In Between? Highlights Our view remains that the Fed is unlikely to announce that it is beginning to taper at this meeting, though it is not totally off the table. While markets are obsessed with the Fed’s decision on tapering, the outcome of this week’s meeting may not be as simple as “taper or no taper.” To help make their decision this week, F ed policymakers will likely be examining several metrics on the labor market, inflation, financial conditions, and the broad economy. We continue to believe that the Fed will begin tapering QE in the first half of 2014 and exit the program altogether by the end of 2014. The Federal Reserve (Fed) holds its eighth and final Federal Open Market Committee (FOMC) meeting of 2013 this week. The FOMC will release a statement to the public at 2 PM ET, on Wednesday, December 18, along with a new set of economic projections. At 2:30 PM ET Fed Chairman Ben Bernanke will begin what is very likely his final press conference as chairman. Bernanke is likely to read a prepared statement summarizing what actions Fed policymakers have taken (if any), and then take questions from the press. Our view remains that the Fed is unlikely to announce that it is b eginning to scale back, or taper, its bond-purchase program, known as quantitative easing (QE ), at this meeting; but a taper is not totally off the table either. We place about a one-in-three chance on a taper announcement at this week’s meeting, and if a taper do es occur, we expect the reduction in bond purchases would likely be accompanied by strong language on forward rate guidance, the Fed ’s promise to keep rates lower for longer. As detailed in our Outlook 2014: The Investor’s Almanac, we expect the Fed to begin tapering QE in the first half of 2014 and to exit the program altogether by the end of 2014. Not Just About the Taper While markets are obsessed with the Fed’s decision on tapering, the outcome of this week’s meeting may not be as simple as “taper or no taper. ” Fed p olicymakers could also consider: § Strengthening its rate guidance. Currently, the Fed (and the market) expects the Fed’s first rate hike in 2015. The Fed could extend that date to 2016 or later. § Ta rgeting an end dat e or end amount of QE. Currently, the Fed says it will continue to pursue quantitative easing until it sees “a substantial improvement in the outlook for the labor market in a context of price stability.” Policymakers could set an end date (mid-2014, year-end 2014) or target amount for QE, in addition to, or in place of, its outcome-based rule. § Setting a floor on c ore inflation. In recent public announcements, the Fed has noted that “inflation has continued to run below the Committee’ s 2 percent lon ger-term objective. ” The Fed could choose to set a floor on c ore inflation, and promise to pursue more QE and refrain from raising rates until inflation reaches a minimum level. We place about a one-in-three chance on a taper announcemen t at this week’s meeting.
