Tags: Sekera | Fed | taper | QE

Morningstar's Sekera: Fed Will Begin Taper in September

By    |   Thursday, 05 Sep 2013 08:07 AM

The Federal Reserve will start to taper in September, predicts Morningstar Senior Securities Analyst Dave Sekera.

"Although recently released economic indicators are pointing to sluggish growth, those metrics have not been weak enough to dissuade the FOMC [Federal Open Market Committee] from tapering," Sekera writes in an article for Morningstar.

The Fed risks losing credibility if it does not start tapering this year, Sekera says. The central bank said it would start reducing its monthly bond purchases if economic data were in line with its expectations. While far from robust, those numbers continue to indicate growth.

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The Fed's asset purchases, known as quantitative easing (QE), are causing other issues, Sekera notes.

The Fed's massive bond holdings are "causing dislocations in the repo market." Further, with U.S. government borrowing declining, the Fed is monetizing a larger percent of new debt issuance. And new research shows that the asset purchases have only slightly helped real GDP growth.

The FOMC schedule also points to a September tapering start, he explains. Fed Chairman Ben Bernanke has a press conference scheduled in September to delve into its report on economic projections.

The FOMC doesn't have any press conference scheduled for the October meeting, so it would not be able to immediately explain its actions, other than giving a brief monthly statement. It has a press conference following its December FOMC meeting, but it's unlikely to start tapering so close to the end of Bernanke's term.

Morningstar predicts the central bank, which is now buying $85 billion of Treasurys and mortgage-backed securities a month, will cut its purchases by $10 billion to $15 billion a month.

Corporate bonds, which already dropped in price, will probably continue to struggle in coming weeks as investors try to anticipate the Fed's tapering plans.

Many economists are betting that tapering will start in September. However, the minutes of the Fed's last meeting in July show Fed officials are divided over when to start reducing QE.

The economy was not improving as fast as some committee members hoped.

"The data received since the forecast was prepared for the previous meeting suggested that real GDP growth was weaker, on net, in the first half of the year than had been anticipated," the minutes state.

Some members advocated being patient and studying more information on the economy before making any decisions. A few suggested it could be time to start decreasing their purchases.

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