At last, quantitative easing (QE) has an expiration date! At least, that’s how most headlines reacted to the Fed’s latest meeting minutes, which included a hypothetical end-date for the bond buying program. Cue the inevitable speculating and hand-wringing over the approach of the Fed’s “day of reckoning.” In our view though, it’s beyond premature. The only revelation here is that the Fed can do basic math. Beyond that, this still isn’t a firm end-date or anything actionable for investors.
What the Fed said, exactly, is this: “If the economy progresses about as the Committee expects, warranting reductions in the pace of purchases at each upcoming meeting, this final reduction would occur following the October meeting.” To many, this was a very long-winded way of saying “QE will end in October.”
But this ignores a few key words. Like “if.” And “would.” It’s all conditional and hypothetical! An accurate translation of that Fedspeak would be more like, “If the economy keeps going the way we think it’s going (and, like, everyone who has ever read our forecasts should know we aren’t really good at this), and we keep winding down QE at the same pace we have been, then by default we’d take it to zero in October.” Or, more simply, if they keep doing what they’re doing, QE ends, but if things start looking yucky, then they won’t. Err … yahtzee?
Basically, the Fed is showing that a) they’re just as uncertain and noncommittal as ever and b) they can do basic straight-line math. Which is a relief because they’re, you know, the Fed. They’re supposed to be mathy. If they couldn’t figure out that taking $10 billion off their initially $85 billion in monthly asset purchases during each of their biquarterly meetings beginning last December meant they’d be at $15 billion when October’s meeting kicked off (seven meetings later), we’d have a problem. The only real question was whether they’d scrap that last $15 billion in one go or leave us with $5 billion in monthly QE until December’s meeting. Mercifully, they seem to be feeling bold.
At least, that’s how it looks like now. Things might change. They have conditions! Fact is, there is no telling what they will do. It doesn’t just depend on what all the economic indicators look like over the next three months. It depends on how Yellen and the other birds at the Fed interpret those results. That’s a human function, not a market one. Maybe Q2 GDP looks shaky and they decide the economy needs more of their alleged support. Maybe things go gangbusters and they just scrap the rest of QE in September.
Even if the guidance were more firm, we wouldn’t put much stock in it. All central bank communiques are just words. Words change. Minds change. So guidance changes. Happens all the time. It happened twice this year! The Fed abandoned its threshold of a 6.5% unemployment rate for considering a rate hike. We got there too fast, and they weren’t ready to think about tightening after all. Mark Carney did the same in the UK, abandoning the BoE’s 7% unemployment rate-hike-conversation threshold after unemployment hit 6.9% in February, about two and a half years ahead of the BoE’s forecasts. He told Brits not to worry, rates would stay low for a good long while. Last month he flipped again.
There is one thing we are pretty sure of: If they stick to this (or accelerate the end—hey, we can dream!), the US would benefit. As we’ve written many times, QE is a drag. It flattened the yield curve and ignored over 100 years of evidence showing steeper curves are better for growth. The sooner the Fed stops buying long-term bonds and dragging down the long end of the curve, the better off the US will be. And few observers see this, making it all the more bullish.