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No Fed Taper But No Market Bubbles Either: Jefferies’ Ward McCarthy

Daily Ticker

It’s Fed day, the day when the Fed issues its latest policy statement! The Fed is expected to leave policy as is, in the wake of questions about the health of the economy and uncertainty surrounding the fiscal fights in Washington.

Related: No Fed Taper This Year: Jim Grant

Ward McCarthy, managing director and chief financial economist of the fixed income division at Jefferies, says policy will be unchanged primarily because growth is slow, the unemployment rate is high, and inflation is lower than the Fed would like it to be. It also boils down to this: “With fiscal policy that is restrictive, monetary policy needs to continue to be accommodative.”

And while economists in a Bloomberg survey believe a taper will come in March, McCarthy thinks it’s wise to take it meeting by meeting because the decision will be data-dependent and Fed officials “keep telling us it’s not predetermined" -- a point many people missed when they expected a pullback in Fed bond buying in September.

Related: Rickards on Fed & Yellen: Here Comes the 'Helicopter Money

McCarthy says December is a longshot for any change in Fed policy because another fiscal fight is looming. Temporary funding for the government expires in mid-January and the debt ceiling suspension expires on Feb. 7 -- both deadlines agreed to earlier this month as part of a plan to end the government shutdown.

Related: Fed Taper Could Wait Until December or Later: Neil Irwin

But what are the consequences of the Fed continuing its easing policies? Laurence Fink, CEO of Blackrock, the world’s largest money manager, told a recent panel discussion in Chicago, “it’s imperative that the Fed begins to taper.” He cited “bubble-like markets” as the reason, referring to the huge increase in equity prices and the dramatic narrowing of spreads in corporate debt.

McCarthy disagrees. "Almost by definition the primary function of QE is to cause markets to perform better than they would [without it]."

Check out the video to see why he doesn't call it a bubble.

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