Breakout

Huge GDP miss complicates Yellen's taper decision

Jeff Macke
Breakout

GDP came in at a desultory 0.1% for the first quarter. It was a the worst GDP print since the fourth quarter of 2012 and a dramatic slowdown compared to the 2.6% growth rate of Q4 2013. Economists had been expecting 1.2% growth but estimates were being cut right into the print, suggesting a shortfall didn’t come as a huge shock.

“The weather” is the pre-packaged excuse for the slip, and Wall Street seems to be finding some solace there. Stocks barely hiccupped in response to the news and are holding on to this week’s gains mid-way through trading on Wednesday. The real test comes about 2pm this afternoon when Janet Yellen and her merry band of FOMC Governors are set to release their statement on monetary policy.

As Yahoo Finance Kingpin Aaron Task and I discuss in the attached video, Yellen’s decision on whether or not to continue weaning the economy off of Quantitative Easing gets more complicated with this soft GDP print.

The Fed has been reducing QE by a total of $10 billion at every meeting since last year. The unofficial plan was that this process would continue until later this year, but the Fed has always left itself this rather large loophole:

If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course…

Also this morning ADP reported 220,000 jobs added to the economy in April and Chicago PMI of 63.0, both well ahead of estimates. Between that and other reads it’s tempting to dismiss this GDP print but Yellen does so at the risk of seeming asleep at the wheel.

Task doesn’t think today’s grim GDP print is weak enough to take the Fed off its unofficially pre-set course. “I think they continue to taper because the concurrent data is showing stronger growth,” Task says. With inflation seemingly in check, Task thinks investors would find a decision to continue tapering to be Yellen’s best option.

Technically the Fed isn’t supposed to care that much about GDP. The official mandate is controlling inflation and fostering employment. If Yellen uses weak GDP as justification for skipping an opportunity to taper, it will suggest an expanded mandate. Such a move would be inconsistent with virtually everything else the Fed has said about hoping to limit its influence in the economy.

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