12.25.2013
By Terry Flanagan

Fed Tapering May Not Be Bullish Sign

The beginning of tapering by the Federal Reserve did not send the markets into a tailspin, as had been feared. But while some believe the Fed’s actions indicated that it believes the economy is starting to get back on its feet, others aren’t so sure.

“What I found most interesting was how optimistic or encouraged many people have been by certain leading economic indicators that have come out in the last six months that would lead people to think we are in a strong recovery,” said John Griffin, senior risk manager at The Hartford Investment Management Company (HIMCO).

John Griffin, senior risk manager, HIMCO

John Griffin, HIMCO

“You can look at the equity bull market, but the flip side of that is that there was a lot of money that was in low yielding fixed income instruments and investors got tired and went somewhere thus beginning to drive equity markets to record levels at a time when the Fed was still QE’ing waiting for evidence that they saw a recovery beginning or strengthening,” Griffin said.

Federal Reserve Bank of Dallas President Richard Fisher, who will be a voting member of the policy-setting committee next year, said in an interview with Fox Business News that he argued for a $20 billion reduction in the Fed’s monthly bond purchasing pace instead of the $10 billion announced last week.

The Federal Open Market Committee announced on Dec. 18 that it would reduce its monthly bond purchases to $75 billion from $85 billion on signs of an improved labor market. Fisher has been among the most vocal critics of the so-called quantitative easing program that began in September 2012 and has been calling for an early slowdown to the purchases.

“A lot of people may point to a lot of numbers that would imply we are in a recovery and are out of the recession, but if you look at the economy overall, there may be a lot of holes in those numbers like reported vs. real unemployment levels,” Griffin said.

Griffin noted that a panelist at Markets Media’s Global Markets Summit on Nov. 21 had “made a great comment about not knowing when the Fed would start tapering which seemed at the time of the conference to still be a moving target for the Fed. It’s like TARP: in hindsight, maybe we would have solved it ourselves. But maybe we wouldn’t have. So it’s always an armchair quarterback conversation.”

The Fed has done its best to stabilize markets, he said. “They’ve kept interest rates low for a somewhat unprecedented period of time and have massively expanded their balance sheet to $3.5 trillion. Have they accomplished what they hoped to in attempting to achieve a full recovery?”

He continued, “The housing market recovery is another interesting topic. Depending on the economic metrics and the zip code(s) you’re examining, I think you could make a strong case for that “recovery” to seem to be getting a bit ahead of itself. I usually tend to come across on the more pessimistic side, since part of the role of a risk management function is to play devil’s advocate to the investment proposals being considered by the business guys.”

Mortgage applications decreased 6.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 20, 2013.

“Following the Federal Reserve’s taper announcement, mortgage application volume dropped again last week, with rates increasing and refinance application volume falling to its lowest level since November 2008,” said Mike Fratantoni, MBA’s vice president of research and economics. “Purchase application volume was weak too, continuing to run more than ten percent below last year’s pace.”

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