The Federal Open Market Committee (FOMC) concluded its October meeting and announced that it would continue the asset purchase program at the current $85 billion per month pace. The committee repeated its consistent message that the purchases would continue until incoming data indicated substantial and sustained improvement in the labor market. The waiting is likely to continue for at least a few more months as analysts try to separate signals from the noise introduced by the early October federal government shutdown.
The October report on September labor market conditions was released two weeks late due to the shutdown and showed payroll growth slowing even before the shutdown took place. The report on October conditions will be delayed one week later in early November and is expected to be tainted by weak growth reflecting a private sector response to the shutdown (furloughed government employees are treated as employed). The weak October conditions will be followed by an overly strong surge in employment as private sector government contractors and employees in support businesses return to work for the full month of November. The report will be released on time in early December, but the January report on December conditions will be the first report free of shutdown distortions.
These distortions in labor market conditions will be mirrored in the range of indicators that policymakers rely on to guage the strength of the economy, including GDP growth, inflation, and the housing sector. This level of contamination in the data has some analysts pushing their predictions of any scaling back or tapering of the Fed’s asset purchases into next year.
For readers of FOMC policy tea leaves two aspects in today’s statement are of interest. First, while the committee’s assessment of the broad economy was largely unchanged since the September meeting, the characterization of the housing sector changed. In September the housing sector was strengthening but mortgage rates were rising. In October the housing sector slowed somewhat in recent months with no reference to mortgage rates.
Second, not only was the mortgage rate language removed from the characterization of the housing market, September’s reference to the tightening of financial conditions (meaning rising longer term interest rates) as a threat to a faster pace of improvement in economic growth and the labor market was dropped.
These changes in the wording of the statement may signal the FOMC has new anxiety about the housing sector, one of the relative (still not fully recovered) bright spots in the economy, but also that the committee feels it has effectively “talked down” interest rates by defying expectations and not tapering in September. The interest rates on 10-year Treasury securities and 30-year fixed rate mortgages have dropped by 40-50 basis points since the mid-September FOMC meeting.
The decline in interest rates should assuage concerns about housing, so perhaps the mixed signals are the FOMC shifting the blame for a slowing housing market from rising interest rates to “crisis governing.” Fiscal policy restraining growth has been a recurring theme at recent FOMC meetings and the methods of restraining growth have grown increasingly dire. Sequestration, the shutdown, yet another near miss on the debt ceiling, these have trimmed economic growth directly through cutbacks and indirectly by rattling consumer and business confidence.
For now it looks like the timing of any tapering is in limbo. The FOMC repeated today that the decision will be data driven, but it will be some months before the data is telling the truth (and the committee probably knows that). And part of the decision not to taper in September was queasiness with the fiscal policymaking process. Given that the federal budget and the debt ceiling (and revisiting sequestration) decisions have been postponed until January and February rather than decided, the queasiness probably shouldn’t subside.
One scenario is theoretically possible. Suppose the October and November labor market data, as well as other economic indicators, are stronger and less shutdown affected than is expected (unlikely), and the warring factions in Washington make peace and fiscal policy in a way that avoids another early 2014 nail-biter (highly unlikely). Under these conditions the FOMC could declare “the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy” and announce tapering in December. Or maybe they’ll wait until March.