The gnashing of teeth and frenzy has begun on Wall Street, and in markets around the world, as the consideration that the Fed might taper has begun. On Monday the St. Louis Federal Reserve Bank President James Bullard said “A small taper might recognize labor-market improvement while still providing the committee the opportunity to carefully monitor inflation during the first half of 2014. Should inflation not return toward target, the committee could pause tapering at subsequent meetings.”
If, and that’s a big if, the Fed decides to taper on a few months of decent data, it will be a small taper. Bullard and his Fed colleagues have no desire to slow down asset purchases because they actually think the program is working. It’s only taken 5 years, but a few people have gotten jobs lately. The Fed must be responsible, right?
In any case, the Fed has some latitude to taper. The budget being cooked up in Washington D.C. will increase the rate of government spending growth. Turns out all the fiscal restraint that surrounded the sequester has become a political hot-potato going into the 2014 election season. So the federal government will be spending more and taking credit for it, while the Fed sells a few bonds and takes credit for a recovery that never really materialized.
Anything sensitive to the dollar has been selling off over the last three days on the mere speculation that the Fed might be thinking about possibly considering the question of an investigation into the realm of possibility that there could be at some point in the near or far or medium term future the decision to taper. You have got to love the new “transparent” Federal Reserve given to us by Ben Bernanke and transparency-czar at the Fed, his successor, Janet Yellen.