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When is the Fed's "Taper Telegraph" Coming?

Kevin Cook

We have come to expect certain things from the most transparent, and most aggressive, FOMC in history. Besides knowing exactly what they are going to do and why, we get a lot of lead time about policy changes.

And we get to hear a lot of dialog among all the economist participants, both voting and non, about their views of the economy and Fed policies in frequent speeches every month. I started keeping track of the messages from the growing hawkish wing in the summer of 2011.

Now the hawkish ranks have grown to at least six in the last few quarters: Fisher, Plosser, Lacker, Kocherlakota, Bullard, and George. These folks are increasingly concerned about the size of the Fed's balance sheet and its distorting effects on the bond and equity markets.

This month, 10-year Treasury yields did an about face back up to nearly 2% from their drop to 1.6% a couple of days after the last FOMC meeting adjourned on May 1.

And though everyone seemed to get really excited after the WSJ Hilsenrath article on May 10 which seemed to be "the leak" about upcoming reductions to QE3 bond buying, Bloomberg published an excellent piece on the "taper" topic on May 1.

Today, with fresh FOMC minutes due tomorrow afternoon and Bernanke testifying about the outlook for the economy before the Joint Economic Committee of Congress in the morning, our own Sheraz Mian has come out with his bold prediction that the Fed will announce some kind of change to the QE3 bond buying policy at the June 18-19 meeting.

His logic is simple and consistent with what he has been saying for months now: the Fed is buying all the Treasury new issuance and it must start paring back -- especially since the deficit is lower and the US actually needs to slow the pace of debt sales (Sheraz says the CBO projects the deficit this year will be $200 billion lower than their estimates of 3 months ago).

And here's the real meat of Sheraz's piece: if the Fed doesn't begin to taper soon, the current schedule of bond buying will in effect be like increasing QE.

So, will the Fed make policy changes that begin "the taper" at the June meeting, or will they only "telegraph" what could be coming and wait until September for actual reductions in bond buying?

Regardless of June or September, what impact will this beginning of the end for QE have on the housing market and it's related stocks? Tracey pointed out to me this morning that Home Depot (HD) is now about 80% above its 2005-06 housing bubble highs!

And the iShares Home Construction Index ETF (ITB), with a P/E of 285, is up over 200% since the 2011 lows.

Finally, are any policy moves affected by the fact that Bernanke could be "outa here" next year and therefore he needs to start clearing a path for the exit strategy of his grand design?

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