Saturday, December 14, 2013

Will the Fed begin to taper QE this coming week?

That's the big question on everybody's minds: Will the Federal Reserve decide at the upcoming December FOMC meeting this coming week to begin the tapering of quantitative easing? My answer, in one word: No. As in no way, no how.
 
Oh, sure, they will "taper" their vigor for maintaining QE and a couple of voting members may vote against continuing QE as-is and maybe include some language suggesting that tapering could be coming soon, but the whole point of QE is to drive unemployment down to the Fed target of 6.5% and we still have a ways to go. The recent decline to 7.0% unemployment was a bit of a stretch and rather lame, so any suggestion that the economy can just coast to 6.5% unemployment without full-blown QE is simply nonsense.
 
Although the budget deal takes away some of the anxiety over the future of the economy, the unresolved issue of the federal debt limit will continue to weigh on the economic outlook.
 
It is easy to say that the economy will be even stronger in three to six months, but in truth it is no slam dunk to assert that 6.5% unemployment will be achieved by even June 2014. I mean, government budgets are still under pressure and companies are still intensely managing expenses, investment, and earnings (to maintain stock prices), so only incremental improvement on the unemployment front is a sure thing for the next six months. My prediction: Unemployment will be in the 6.6% to 6.8% range in six months and 6.5% won't be hit until the summer or fall of 2014.
 
Another key uncertainty in unemployment is the extent to which people who had dropped out of the job market because they could not find jobs earlier in the recession and recovery see the improvements on the employment front as a reason to once again start looking for a job. Ironically, that improvement actually raises the number of people who are unemployed if only temporarily. This is because technically people who abandon looking for a job are no longer counted as unemployed – they are counted as "not in the job market."

-- Jack Krupansky

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