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The WSJ’s inimitable Jon Hilsenrath writes that the Fed is set to signal tapering at their June meeting, with a cut in the purchase programme likely at the July or September meeting (i favour December, as i think inflation will be lower than they expect).

Federal Reserve officials are likely to signal at their June policy meeting that they’re on track to begin pulling back their $85-billion-a-month bond-buying program later this year, as long as the economy doesn’t disappoint.

A good-but-not-great jobs report Friday ensured officials wouldn’t want to act right away and would instead want to see more data before taking a delicate step toward winding down the program.

Fed Chairman Ben Bernanke signaled last month that the central bank could start pulling back the program “in the next few meetings,” a view echoed by other officials in recent weeks.

The Fed’s next meeting is June 18-19, and after that at the end of July and in mid-September.

Many believe the job market and the broader economy have made enough progress to warrant considering a partial pullback in their bond buying, but they still have reservations about the outlook that give them pause.

Friday’s employment report likely doesn’t change the Fed’s view of the job market. The jobless rate ticked up from 7.5% in April to 7.6% in May, but it is down a half percentage point since last August, just before the Fed launched the program. Employers added 175,000 jobs in May, which leaves the average at about 190,000 per month since August.

The central bank faces a number of challenges. One is managing the signal that they send to the market with their next series of moves.

Officials in their public statements have been trying to make clear that they are going to proceed cautiously with the bond program and are still probably years away from raising short-term interest rates, which have been near zero since late 2008. But after weeks of market volatility, they’re worried that the market could overreact to even a small move away from their easy money policies.

They also run the risk of errors in their forecasts. In every year of the recovery, officials have expected the economy to grow faster than it did.

The inflation outlook is also uncertain. The Fed expects inflation this year of 1.3% to 1.7%, below their 2% objective. But most of the inflation measures the Fed watches are running well below those forecasts. Many officials are expecting inflation to move back toward their 2% goal later this year. If it fails to do, some officials might want to keep the bond-buying programs going longer than planned.

Financial market behavior is a third factor that could move them in the other direction. Some officials have grown worried that the central bank’s easy money policies could brew a new bout of excesses in credit markets. The view doesn’t prevail at the Fed, but if those worries mount, some officials might see added reason to pull back on bond-buying sooner rather than later.


  1. (Near-duplicate comment, earlier caught in moderation due to a typo)
    Yet the market still finished strongly up. Clearly quite abrupt tapering had been priced in.

  2. “The sharp swoon in the AUDUSD exchange rate since the beginning of May has been accompanied by a brisk narrowing of the yield spread between benchmark US and Australian 10-year bond yields. This implies an Aussie-negative realignment of investors’ perceptions of relative returns to be had from holding one currency over the other. That spread ended last week at 1.0892 percent, a hair above the record low at 1.0711 percent recorded in November 2008 at the height of the global financial crisis.”

      1. yes, and the current narrowing spread seems to point to a even lower AUD.

        1. yeah, it seems the market is going to have the nominal exchange ‘correct’ — which, by the way, is the reason joye’s note this weekend is tosh.

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