Jackson Hole and Weak US Data Minimize September Tapering Start

During last weekend’s Jackson Hole annual conference the main topic of discussion was the Fed’s near imminent reduction of its bond buying program. The program spends 85 billion USD a month and is part of the low interest rate environment the Fed created to help the US economy out of a crisis. Growth has been picking up, but the main debate with tapering has been one of timing. End the stimulus too soon and you risk pushing the US back into a recession.

Ben Bernanke was a notable absence this time around. His heart might not be in it as he will not be the Fed’s chairman come next year. The high stakes of starting the taper and the fact that there will be a new head has made the market call the Fed’s bluff regarding when it will actually reduce the stimulus program.

Central banks have tried to steer their economies with sheer bold statements after rates have hit record lows around the world. Stimulus programs have been maintained, but not increased in the past year. The US is ready to cut down on its costly stimulus and signal the end of record low rates that have fuelled housing and stock market rallies.

The conference in Jackson Hole Wyoming even without the Fed’s chairman was a good example of the problem facing the US central bank. The arguments from both camps seem reasonable, and they both agree that the current stimulus program is unsustainable. The main difference is when and by how much to start the tapering. Given the lack of leadership as Bernanke winds down his own Fed participation and the current fragile state of the economy a compromise seem the most likely outcome. Tapering will start in September as 65% of Bloomberg polled economists forecast. The big question is then, how much will the Fed reduce the stimulus by? Forecasts are around 10 to 15 billion. The compromise could be on the size of the taper, which could end up being lower than forecasted in September and higher as more signs of economic recovery are felt.

The US durable goods number released this morning is the perfect example of how closely the market is watching signs that make the case for or against tapering. The drop was the biggest in nearly a year and broke a three month growth streak. The stock market saw a gain as investors don’t see the Fed starting tapering when the economy is not strong enough.

Yet the Fed has pointed to a taper from quite a long time, and they might be ready to start the process if even a symbolic start with a smaller than forecasted amount.

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