On December tapering

This is a brief note because I need to alter my view on the Fed’s taper a smidgen. Yesterday, I said tapering is coming and I implied that it is likely to happen next week.

“The Fed Presidents then are lining up against QE3 and that means a taper is likely to happen sooner than later. The market is still betting on a March taper but the number of people saying December or January has increased.

I think Bullard’s call for a small taper as signal is the likely option and I believe we will see it next week and if not, then in January. “

I now think December may be too aggressive a move for the Fed. In re-reading Fed hawk Charles Plosser’s comments on QE in a post from the links yesterday, I have come to the conclusion that even hawks don’t believe we will taper in December.

Here’s the exchange between Plosser and the New York Times (I have highlighted the key part):

Q.

Do you think the Fed should taper its bond buying in December?

A.

Most of you know that I was never a big fan of this program in the first place, so part of me says the sooner we can end this thing the better. But in reality, the sooner we say we’re going to end this program once we’ve purchased X, the sooner we say that, the better. I’m not going to give you a dollar amount. We can debate about what that number is – I want it smaller, some of my colleagues want it larger – but the sooner we say that, the better. Pick a time and reduce the uncertainty between now and then. I wouldn’t even say that you taper, you just say that we’re going to stop then. We’re going to buy at this pace until then, just like we did with QE2, which we did without much disruption or much problem or people trying to anticipate what are we going to do. It’s that constant uncertainty about what we’ll do at each and every meeting that I think we can eliminate this way, and we’ll be better off for it, and we’ll not sacrifice much of the benefits of the program.

Q.

So you don’t necessarily think the Fed should taper?

A.

I don’t see any reason why we couldn’t say in December, we’re going to buy X and do that every month until we reach X and then stop. And there’s no tapering necessary.

So Plosser is not arguing for tapering to commence in December. He is arguing that tapering shouldn’t even happen. Rather, Plosser believes the Fed should run out the clock on QE3 the way it did with QE2 with no taper whatsoever. And that means, according to how I read his comments, pushing back the ‘taper’ timetable to when QE ends.

Now I assume KC Fed Chair Elizabeth George agrees with Plosser. And so this makes St. Louis Fed Chair James Bullard’s ‘tiny taper’ the compromise du jour. If the hawks want to end it in one fell swoop and others want more QE – Plosser says “I want it smaller, some of my colleagues want it larger” – then the best compromise could be less QE over time i.e. the ‘tiny taper’.

Could that happen in December? Yes. But having re-read Plosser I am less sure of it. Time will tell