(James Saft is a Reuters columnist. The opinions expressed are
By James Saft
April 30 The Fed charged ahead with its taper
Wednesday; pity about all the evidence.
I don't usually like to quote from FOMC statements, which
are designed to be boring, but check this out:
"Information received since the Federal Open Market
Committee met in March indicates that growth in economic
activity has picked up recently"
I know this world is all about 'what have you done for me
lately?' but this is just silly.
Growth has picked up in April, perhaps, but that's after it
was almost nothing, literally, in the first three months of the
Wednesday we learned that growth in the economy in the first
quarter was only 0.1 percent, and that was courtesy of a huge
increase in health spending. If you zero out health, the economy
actually contracted by about 1 percent last quarter.
So the Fed saying economic activity has picked up recently
is a bit like a man whose house was hit by a tornado yesterday
saying his housing has improved recently because they put boards
over the windows today.
In both cases the weather may have improved, but in both
cases we still face considerable difficulties.
And yet still the Fed tapers.
The Fed also noted that the housing recovery, which is
usually a key leading indicator of the economic cycle, remained
I'll say it's slow.
Residential investment actually made a negative contribution
to GDP in Q1 for the second consecutive quarter, meaning it was
a drag on growth.
One consequence of the taper is that as of now the Fed only
buys $20 billion of mortgage-backed securities per month, along
with $25 billion of Treasuries. Given that 30-year mortgage
rates, now at 4.3 percent, are up 73 basis point in a year, this
can't be helpful for mortgage originations or housing
That's a real tightening, and we might reasonably expect
mortgage interest rates to be lower, and potentially investment
higher, if it were not the case.
Now, to be sure, the economy was slowed by bad weather in
the first quarter, and so we might expect some bounce-back. But
blaming residential investment's slump, two quarters of it, on
cold weather in January in New York is to ignore Sacramento and
Las Vegas. It also ignores the real impediment to household
creation: decent jobs and decent wages.
It isn't so much that I am arguing that QE can fix all of
that, but rather that we ought to acknowledge that the Fed is
getting out of the bond-buying business despite all of that.
Yes, there are parts of the economy which are reasonably
strong, notably consumer confidence and spending, but the labor
market is still very weak and inflation is no threat. That's all
consistent with 0.1 percent growth but not, on its face, with
So, why is the Fed so eager to back away from QE? First off,
it is important to acknowledge that there is no single answer to
that: the FOMC encompasses a variety of opinions and the
dividing lines are more muddied than simply 'hawks' and 'doves'.
It is likely, at least in part, that the desire to end bond
buying comes out of an analysis of its risks and benefits. While
it is surely stimulative, the distribution of QE's benefits are
uneven, and concentrated in those closest to the point of
As well, there are the risks which bond buying potentially
builds up within credit markets: namely bubbles.
Jeremy Stein, who is leaving the Fed at the end of May,
suggested that where there is a conflict between financial
stability and the bank's dual mandate it should perhaps err on
the side of financial stability. (here)
That's different from saying credit markets are now in
bubble territory, which he did not, but it is a meaningful way
of looking at the central bank's decisions given the apparent
conflict between sluggish growth, low inflation and cutting back
on a stimulative policy.
For now the Fed seems to be choosing stability, perhaps
because, unlike growth, stability may actually be achievable.
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at firstname.lastname@example.org and find more columns at blogs.reuters.com/james-saft)
(Editing by James Dalgleish)