Fed Mulls Tapering in the Near Future
- Nov 21, 2013
The Federal Open Market Committee released the minutes from its Oct. 29-30 meeting on Wednesday, and one of the more closely watched subjects taken up in was tapering. The question now isn’t whether to taper, but how much and exactly when. The central bank hasn’t quite made up its mind about that yet—but the minutes seem to say that it will be a matter of months before tapering kicks in, albeit gradually.
“During this general discussion of policy strategy and tactics, participants reviewed issues specific to the Committee’s asset purchase program,” the FOMC minutes said, referring to the $85 billion worth of bond buying that the Fed has been doing every month. “They generally expected that the data would prove consistent with the Committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months.”
Perhaps more importantly for the long-term health of the economy, the FOMC also discussed at length the federal funds rate, which is currently next to nothing. The committee said it was thinking about a way to tell markets that the rate is going to remain that low for a long time, and whether to lower the unemployment rate threshold for considering any rise in the rate.
The minutes—in their long-winded way—said that “as part of the planning discussion, participants also examined several possibilities for clarifying or strengthening the forward guidance for the federal funds rate, including by providing additional information about the likely path of the rate either after one of the economic thresholds in the current guidance was reached or after the funds rate target was eventually raised from its current, exceptionally low level.” We’ll get to it when we get to it, in other words.
Inflation still nugatory
One of the persistent worries about QE3—at least among a certain class of economists—is that the stimulus will cause inflation. So far, however, inflation refuses to rear its ugly head: the Bureau of Labor Statistics reported on Wednesday that the all-urban CPI in October dropped 0.1 percent, mostly because of declines in the price of gas. Over the last 12 months, the all-items index has increased 1 percent.
The gasoline index fell 2.9 percent in October. Other energy prices were mixed, with electricity rising, but fuel oil and natural gas declining. The food index rose slightly, with major grocery store and food group indexes evenly split between advances and declines. Take food and energy out of the picture, and prices were up 0.1 percent in October.
Everything else was likewise a mixed bag in terms of price increases and decreases. The price of shelter rose, but at the slowest rate since the end of last year. Air fares, recreation, and used cars and trucks also became more expensive. Medical care—surprisingly—was unchanged, while apparel, household furnishings, and new vehicles all became less expensive.
Existing home sales see downtick
The National Association of Realtors reported on Wednesday that total existing-home sales dropped in October to an annualized rate of 5.12 million units, down 3.2 percent compared with September. Year-over-year, sales are better: the current rate is 6 percent higher than the 4.83 million-unit level in October 2012. Sales have remained above year-ago levels for the past 28 months.
The national median existing-home price for all housing types was $199,500 in October, up 12.8 percent from October 2012, which is the 11th consecutive month of double-digit annual increases, the Realtors reported. Distressed properties—foreclosures and short sales—accounted for 14 percent of October sales, unchanged from September, but very much changed from October 2012, when they were 25 percent of the total. Part of the gain in median price is from a smaller share of distressed sales.
Total housing inventory at the end of October declined 1.8 percent to 2.13 million existing homes available for sale, which represents a five-month supply at the current sales pace, according to NAR. The supply was 4.9 months in September. Unsold inventory is 0.9 percent above a year ago, when there was a 5.2-month supply.
Wall Street didn’t much like what the FOMC minutes had to say on Wednesday, with an up day turning into a down day as soon as they were released. The Dow Jones Industrial Average dropped 66.21 points, or 0.41 percent, while the S&P 500 and the Nasdaq were down 0.36 percent and 0.26 percent, respectively.