U.S. GDP grew 2.5% in the second quarter, revised up from 1.7%, the government reported Thursday. The stronger-than-expected upward revision reaffirmed consensus expectations the Fed will begin “tapering” at its next meeting in September.
But Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi, isn’t so sure a September tapering is baked in just yet.
“I’m pretty sure Bernanke…will want to keep going with all sorts of stimulus because he doesn’t think anything is good enough at the moment; the unemployment rate, especially, is too high,” Rupkey says. “I think he still wants to keep pushing.”
In the above video, Rupkey and I discuss a number of factors that might cause the Fed to delay a tapering of its current $85 billion per month quantitative easing program, including:
Got to Have a J-O-B: The unemployment rate fell to 7.4% from 7.6% in July, but Rupkey notes that was largely due to people leaving the labor force vs. organic growth in hiring. “The markets are attuned to ‘where is the unemployment rate’ but [Bernanke] sees a very difficult situation with under-employment,” he says. “If you look at the number of people working part time who want full-time [work] that’s bad.”
Mortgage Rates: Average fixed-rate mortgages have jumped a full percentage point to 4.5% since Bernanke said tapering could occur "in the next few meetings" back on May 22. “Isn’t that taking a toll on growth?” Rupkey wonders, noting the 13.4% drop in July new home sales could be “the first evidence higher rates are slowing the economy.” (Yes, it’s ironic: the FOMC just talking about tapering could cause a delay in them actually doing it.)
Emerging Market Meltdown: Emerging market currencies, most notably India’s rupee, have tumbled in anticipation of Fed tapering. Capital fleeing emerging markets in anticipation of higher U.S. rates might give the Fed pause on its taper timeline, Rupkey says. “If emerging market currencies continue to tumble it could be shades of September 1998” when the ‘Asian contagion’ spooked global markets. As The WSJ reports, several emerging market central banks have begun to tighten monetary policy in an effort to stem capital outflows, boost local currencies and stem rising inflation. But such actions will also likely curb growth, which can't be to Bernanke's liking. (Update: India is trying to arrange coordinate action among emerging market countries to boost their respective currencies, Reuters reports.)
Inflation MIA: The Fed thinks inflation is too low and cited this as a downside risk in the statement following its July policy meeting. Rupkey notes the Fed’s inflation target is 2% for the core PCE deflator, which is currently at 1.2%; July figures will be reported on Friday.
Do-Nothing Congress: Bernanke frequently mentions the absence of fiscal stimulus as a reason for the Fed’s aggressive monetary policy. With the sequester, the government is actually putting a drag on growth, albeit not as much as feared last spring. Still, the Fed might be reluctant to taper ahead of the the looming fight over the debt ceiling, likely to hit in October. “I don’t like brinksmanship and I thought we’d learned in 2011 not to do this but it looks like [the Republicans] are prepared to go down to the wire to get some concessions from the Obama administration,” Rupkey says. (And on the flip side, Treasury Secretary Jack Lew told CNBC the White House will "not negotiate" over the debt ceiling, meaning both sides are braced for a fight.)
“Various things suggest QE should continue for a while,” he says. “ What’s the hurry?”
For the record, Rupkey is hoping the Fed tapers sooner rather than later – “I want them to start normalizing policy,” he says – and is generally more bullish on the economy than most Daily Ticker guests. “But I’m afraid they’re going to move the goalposts again,” he laments.
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