Only Thing the Fed Will Taper This Year is Its Growth Forecast: Economist
Investors listen up: The Fed has NOT decided to reduce its asset purchases later this year, as many were expecting.
In prepared remarks to Congress Wednesday, Fed Chairman Ben Bernanke said the central bank’s “asset purchases are by no means on a preset course,” dispelling expectations many have held since late May when Bernanke, in another appearance before Congress, said the Fed could decide in the “next few meetings” to taper its bond buys.
Related: Ignore Feldstein, The Fed Should Taper in 2014: Dean Baker
At the same time Bernanke employed the stereotypical balanced approach of economists that's often made fun of:
“On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly,” said Bernanke. “On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions... were judged to be insufficiently accommodative... the current pace of purchases could be maintained longer.”
And the winner is: the same pace of asset purchases, says Yelena Shulyatyeva, U.S. economist at BNP Paribas. Bernanke’s latest message “is really dovish," she tells The Daily Ticker.
Related: Fed Statement Could Lead to "Amateur Hour" in the Markets
“The Fed is watching the data very closely,” Shulyatyeva says, and the data is shaping up to show “slower growth in the second quarter--much slower than the FOMC anticipated.”
Indeed, June housing starts fell almost 10 percent to a 10-month low and June retail sales rose 0.4%--half the increase economists had expected--although other economic data suggest the recovery is continuing.
Related: Weak Retail Sales Means Fed Tapering Later vs. Sooner
Shulyatyeva herself says second quarter GDP will likely grow by less than 1%, which means second half growth would have to soar to 3% in order to reach the Fed’s annual forecast. And that, says Shulyatyeva is “not possible.” She expects the Fed will lower its growth forecast rather than taper its bond purchases anytime soon. Watch the video above to see her demystify how the Fed analyzes the economy and sets strategy.
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