Forex News: Currency Briefing: What’s the risk of Fed taper being on “auto-pilot” mode?

By: Tsvyata Petkova
Tsvyata Petkova
Tsvyata reports prmarily on foreign exchange market and daily fx rates. Today, she is a leading FX Dealer for… read more.
on Feb 14, 2014
Updated: Oct 21, 2019

Yesterday the WSJ published an interesting survey among economists where the majority expected the Federal Reserve to stick to its strategy of scaling back its monetary stimulus asset purchases in $10 billion increments at coming policy meetings, and conclude the program by the end of the year.

More than 70% of the 46 economists surveyed — not all of whom answered every question — expected the Fed to persist with its slow-and-steady reduction strategy or to gradually reduce its monthly bond-buying.
“They are effectively on auto-pilot for now,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.
After two consecutive decreases in the asset purchases in December and January, Fed officials have also pledged to continue decreasing in “measured steps” (another adorable term), provided the economy advances in correspondence to their forecasts — a message the newly-installed Fed Chair Janet Yellen underscored to lawmakers Tuesday. She said it would take a “notable change” in the Fed’s outlook for growth, employment or inflation to cause the Fed to pause its winding down of the program, which aims to spur spending, hiring and investment by pushing down long-term borrowing rates.

Expectations for the program’s end date changed. Slightly less than one-fourth of economists saw the central bank ending bond purchases in October 2014. The next most popular predictions, in order, were December, November and September of this year. Altogether, about 60 per cent of economists see the Fed ending the program in the fourth quarter.
The average prediction was that the Fed’s portfolio of bonds and other assets would be worth $4.4 trillion when the bond-buying program ends, up from less than $900 million before the crisis.

According to the WSJ survey, five economists believed that the Fed will end up going faster than the $10 billion-per-meeting plan. “Stronger than expected growth forces their hand,” predicted James Smith of Parsec Financial.
Five others expected the Fed to slow the pace of reductions in response to a weakening economy. “The Fed wants to get out of bond purchases, but has a habit of overestimating growth,” observed Diane Swonk of Mesirow Financial.

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About one-third of economists said the Fed would pause if inflation slows, though most did not expect that to happen. Fed officials are watching inflation readings closely since they’ve been consistently running below their 2 per cent target. The price index for personal consumption expenditures — the Fed’s preferred inflation gauge — was up 1.1 per cent in December from a year earlier. The “core” PCE price index, which excludes volatile food and energy prices, was up 1.2 per cent.

Julia Coronado, chief economist for North America at BNP Paribas, said if the core PCE price index falls below 1 per cent it could cause the Fed to halt reductions. Her team doesn’t expect that to happen, but they see further disinflation as a real risk since the index “has been bumping between 1.1 and 1.2 for about a year,” having fallen from a peak of 2 per cent in 2010. “Low and falling core inflation would be a reflection underlying weakness in the economy and we think the Fed would respond.”
The main indicator for today will be the Eurozone GDP 4Q 2013 YoY due out at 10:00 UTC. The consensus forecast is for an increase in the economic activity by 0.4 per cent, in comparison with -0.3 per cent the prior quarter. Following disappointing U.S. retail sales, the greenback fell against major peers the euro got boosted to near 1.3700 and, in case of figures in line with expectations or even better, the euro is poised to head towards 1.3891, December 2013 high.

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