Following the release of the Fed’s latest FOMC minutes, the bond markets have witnessed violent movements with prices plummeting and yields shooting up. People have pressed the panic button a little too early and may have jumped too far, feels David Blanchflower, economics professor at the Dartmouth College and a former policy maker at the Bank of England.
If the Fed was ready to start tapering, they would have gone ahead and announced that in the last meeting. The Fed’s move will be “path dependent” and the policymakers are going to wait and see. It’s unlikely the taper issue will be resolved by the September meeting, given the way the minutes read.
Taper is surely going to come, but the big question is when? Also, it’s not clear which of the assets the Fed would stop buying, i.e. the mortgage-backed securities (MBS), Treasuries or bonds, Dave observed.
Asked if the markets are telling the Fed what to do given the abrupt spike in bond yields, Dave answered in the affirmative. A similar trend was witnessed recently in the UK, which the Bank of England termed as “unwarranted rise in yield.”
In essence, the market movements are making it less likely that the Fed will taper because the jump in yield is equivalent to some form of tightening. (Chairman Bernanke has already underlined the difference between tapering and tightening or rise in interest rates). The members of the Federal Open market Committee will be aware of that.
The markets have erred in reading the mind of the policymakers because they think it’s a done deal. But it’s far from it, and there’s no indication where the votes (of the FOMC members) are going to go. To bring down bond yields, the Fed may do more quantitative easing instead tapering in the end, Dave argued.
Asked to comment on the lack of consensus among policymakers, Dave said it is quite clear from the minutes that there are differing views and it is possible the doves will dominate in the end.
The members acknowledge the improvement in the labor market, but are worried about the fiscal policy. On the net, the risks are on the downside. People have differing views and they have made it clear that they are going to watch the data closely. The reason for that is people aren’t sure how to get out (of quantitative easing) and the matter still remains unresolved, he concluded.
You can watch the video here.