Tags: Bob Johnson | Fed | taper | economy

Morningstar's Johnson: 'Now Is a Great Time' to Taper

By    |   Friday, 20 December 2013 07:40 AM

Although the stock market largely shrugged off the Federal Reserve's move to start tapering its economic stimulus, the economy still needs the Fed, warns Morningstar Director of Economic Analysis Bob Johnson.

Reducing the stimulus too quickly is riskier than continuing it, Johnson said in a Morningstar video.

With inflation at 1.2 percent on a year-over-year moving average basis, way below the Fed's 2 percent target, deflation of a significant worry, he said.

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"If we had a high inflationary environment, then I'd say you'd better stop some of that bond buying now and cool thing down a little bit. But right now it's almost the opposite problem, and deflation could be an issue."

The Fed's quantitative easing (QE) is needed to offset Washington's tight fiscal policy, Johnson argued. Plus, smaller than usual Social Security increases in January will impact spending, and decreases in the Federal Housing Authority's mortgage limits will impact housing.

Still, the Fed made the correct decision to reduce its monthly bond purchases from $85 billion to $75 billion at Chairman Ben Bernanke's last meeting, Johnson argued. An unwritten rule says a new chairman should not change programs in their first few months. "Now is a great time to" taper, he added.

A couple months of good economic data would prompt the Fed to taper more, perhaps to $65 billion a month. But if the numbers get worse, it will pause. "I don't think we'll see them going back to $85 billion. I don't think we'll ever reverse that curve."

Importantly, the Fed will maintain a loose monetary policy despite tapering.

"They actually clarified their thinking. Until we're well under 6.5 percent in terms of an unemployment rate, they really won't consider moving those short rates."

Deflation is a significant threat, agrees The Economist.

"It is entirely possible that the tapering decision will prove premature," the magazine warned. "The Fed terminated two previous rounds of QE, only to restart them when the economy faltered and deflation fears flared."

The Fed's economic forecasts have been repeatedly overly optimistic, and the falling inflation rate is disturbing.

"Low inflation is both a prelude to actual deflation, and troublesome in itself. If households come to expect inflation to stay low, then real interest rates rise, holding back demand."

The Fed's decision could be seen as a "passive acceptance of lower inflation," the magazine stated.

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Economy
Although the stock market largely shrugged off the Federal Reserve's move to start tapering its economic stimulus, the economy still needs the Fed, warns Morningstar Director of Economic Analysis Bob Johnson.
Bob Johnson,Fed,taper,economy
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2013-40-20
Friday, 20 December 2013 07:40 AM
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