NO TAPERING ! THE UNCERTAINTY CONTINUES....

By Ruma Dubey

This came as a complete shock – a pleasant one but nevertheless, a shock.

As against the expectations of the entire world, Ben Bernanke did not taper, did not ease QE and the US printing machines will continue to print $85 billion per month.  Thus everything remains status quo; the stimulus continues.

This is naturally good news for the markets but at the same time, what this also means is that the uncertainty continues.  The tapering is inevitable but just when the markets and the marketmen were psychologically prepared for a tapering - markets would not react overtly if tapering is to the tune of $10-15 billion and could crash if around $20 billion or more.

But the big question then is – why did the Fed not get into tapering now? What led to this further postponement?  And that is the more worrying aspect – this means that the economy has not yet improved; it continues to require the expensive crutches of $85 billion.  This also means that the Fed continues to have a more dovish outlook. Bernanke stated at the Press Conference that the FOMC decided to continue with the QE as data did not support tapering. though they has looked at the possibility at its June meet.

The Fed has decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. The Fed has stated that the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement. In the Press Conference later, Bernanke's speech indicated that the officials see weaker growth and slower inflation than they did before and that is the prime reason for the QE to continue though downside risks to growth have diminished.

A quick highlight of the FOMC statement:

• Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Bernanke said it was above acceptable levels.
• Though household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth.
• Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.
• The Committee recognizes that inflation persistently below its 2% objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.
• The Fed has stated that this continuation of QE should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.
• Rate rise may not come till unemployment does not come down to less than the targeted 6.5%. The first rate rise could come not later than 2015.
• Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.
• The Fed left unchanged its guidance that it will probably hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5% as long as the outlook for inflation is no higher than 2.5%.

Clearly, the markets will react positively to this news tomorrow morning and then continue to await the next FOMC meet for hints once again on tapering. The expectation is that news on tapering might now be announced in October. But Bernanke has stated that there is no "fixed calender" to tapering and it is tied to economic data only.