Fed remains mum on tapering

August 01, 2013

| MoneyRates.com Senior Financial Analyst, CFA

The Federal Reserve has a knack for keeping investors on the edge of their seats without really doing anything. As anxious as Wall Street may be about the Fed's plan to ease away from its stimulus campaign -- a transition that has become known as "tapering" -- the Federal Open Market Committee (FOMC) release from this week's meeting supplied little new information.

In part, the lack of new information on tapering may be because the economic outlook has become somewhat murkier in recent weeks. But it may also be because market speculation is already taking care of some of the transition to a more normal interest rate environment.

Market and economic context

While the stock market has had a strong run so far in 2013, there have been some short-term jolts whenever the Fed has hinted that it may start to ease back from its stimulative policies. The stock market benefits from the low interest rates that have resulted from those policies, and while the market also welcomes the higher growth that would prompt an end to the stimulus, rising interest rates are bound to cause some adjustments and uncertainty.

The economic context is that this discussion of tapering began when it appeared that growth was gathering momentum. However, the latest Gross Domestic Product release from the Bureau of Economic Analysis suggests that growth in the first half of the year was actually quite tepid.

No new announcements

Given all the discussion surrounding tapering, it was widely speculated that today's FOMC statement would provide more detail on the exit strategy from the Fed's various stimulative measures. Instead, that statement simply reiterated once again that those measures would remain in place until growth was better established and the unemployment rate had dropped down to 6.5 percent.

The murkier growth outlook recently has both increased uncertainty and likely pushed back the date when tapering would begin, so it is plausible that the Fed simply felt it does not yet have enough information to lay out a timetable for cutting back its stimulus measures.

The talking strategy

While the official FOMC statement provided no new information on the tapering strategy, it is possible that Fed Chairman Ben Bernanke will provide some additional hints in subsequent press conferences and speeches. That has been his approach lately: While the formal statements have been reluctant to deliver anything that resembles an official commitment, Bernanke seems intent on steering the markets subtly in the direction of the Fed's thinking.

This talking strategy may actually be phase one of the tapering plan. After all, even with no formal action on the Fed's part, just the talk of tapering has driven bond yields and mortgage rates sharply higher over the past three months. Now the Fed can sit back and see how markets and the economy adjust to those changes before committing to anything formally.

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