Did you know that Missouri is the only state that’s home to two Federal Reserve banks? There’s one in St. Louis and there’s one in Kansas City, Missouri over on the western edge. And while KC and St. Louis are only about four hours apart by car, on the surface, their respective Fed presidents seem to be poles apart on the issue of “the Taper.” (Caps because I think “Taper” is the new buzzword – this year’s “Fiscal Cliff.”)
The Fed published its FOMC statement on Wednesday, and while they kept all of their QE programs in place, there were two dissenters noted at the end of the statement. One dissenter was a hawk, and one was a dove…and they’re both from Missouri-based Fed banks. On the hawk side, Kansas City Fed president Esther George felt that “the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and…could cause an increase in long-term inflation expectations.” On the dove side, James Bullard from the St. Louis Fed dissented because he felt that the FOMC “should signal more strongly its willingness to defend its inflation goal.” Even though the FOMC statement and Bernanke’s comments afterward made it clear that the Fed was ready to alter QE in either up or down, depending on the economy’s reaction, Bullard felt that it was premature to include language about tapering the QE program…or, as a press release on Friday clarified, he “felt that the Committee’s decision to authorize the Chairman to make an announcement of an approximate timeline for reducing the pace of asset purchases to zero was a step away from state-contingent monetary policy.”
This dovish view puts Bullard in the same camp as economists like Paul Krugman, who posted similar feelings in his blog (pay wall) on Thursday. Hint: the title is “A Potentially Tragic Taper.” The concern is that the economy may not do as well as the Fed believes. If that’s the case, then talk of tapering is probably premature and potentially harmful.
The hawkish dissent came from Esther George, and while she didn’t issue her own press release, I looked back at a speech she gave in Santa Fe, New Mexico just a few weeks ago. In her remarks, she clearly voices her opinion that the asset-purchase program should be slowed. To support her view, she points to anxiety that markets view the unprecedented QE programs as “conventional,” and that it’s time to shift policy focus to a longer-run view in a manner that will “return the economy to a state less dependent on monetary stimulus.” In Ms. George’s opinion, paring back purchases isn’t tightening per se, it’s “slowing policy easing.” To paraphrase her, it’s not hitting the brakes; it’s taking your foot off the gas.
If the economy is improving as the Fed projects (our forecast is for U.S. GDP growth around 2% for 2013 as a whole and about 3% for 2014), then it probably is the right time to start winding down QE. That would mean that markets have overreacted. If, however, the economy stalls sometime in 2013 or 2014, then markets will need to be reassured that the Fed will put their foot back on the gas.
For his part, Chairman Bernanke used his post-FOMC meeting press conference to get the message across that the Fed isn’t “definitely” moving towards the exit of the QE play this year. Tapering is still contingent on the economy picking up in line with the Fed’s expectations.
In the United States, Missouri is often referred to as the “Show Me State,” a slogan referencing Missourians’ supposed resistance to believing anything too quickly or trusting anything to readily. Given that, maybe Presidents George and Bullard aren’t so far apart. They’re essentially saying the same thing – show me. As we move into the second half of the year, the data will indeed show us if the recovery can stand on its own, or if we can show QE the door.
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