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Analysis
One surprise amid the tapering decision

One surprise amid the tapering decision

Fed open to reversing QE cuts if data warrant

by Gabriel Stein

Thu 19 Dec 2013

Yesterday’s decision and statement by the Federal Open Market Committee (FOMC) contained two expected developments and one surprise.

The expected developments were the decision to begin to taper quantitative easing (QE) from January 2014, and the notice that interest rates would remain unchanged even after unemployment has fallen below the previous 6.5% threshold.

The fact that no new unemployment threshold was given is probably due to two factors. First, the Fed wishes to adopt increased flexibility instead of tying policy to a specific number – a welcome retreat from ever-more detailed and thus ever-more confusing forward guidance. Second, the decision also indicates uncertainty and an internal Fed debate about exactly where is the US natural rate of unemployment.

The surprise was the dissent by Eric Rosengren, president of the Federal Reserve Bank of Boston, who felt that the decision to taper was premature. The surprise was not so much Rosengren’s views, which are well-known, rather that this was the first time since December 2011 that a dove has dissented from the majority. The implication is that there remains substantial opposition within the FOMC to the taper decision. It is a signal that markets cannot take for granted that QE taper now is a one-way street.

Economic developments argue that this should be the case – but the Fed clearly remains prepared to reverse QE cuts if the data point in this direction.

Gabriel Stein is Chief Economic Adviser of OMFIF.

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