To the surprise of virtually no one, the Federal Reserve kept its cheap-money policy in place, but markets interpreted language in the decision to mean that the end may come sooner than expected.
Wall Street had expected the Fed to refrain from tapering its so-called money printing operation. Economic data, particularly in employment and consumer confidence, has weakened over the past two months, giving the U.S. central bank cover to continue unabated.
Language in the October statement mirrored the “moderate pace” of economic improvement that the Fed saw at its last meeting in September.
The statement, though, did omit a reference from last month that fiscal tightening could slow growth in jobs and the broader economy, and it excluded mention of the political battling in Washington.
“There is no explicit mention of the government shutdown or what impact it might have on the economy or the Fed’s monetary policy,” Paul Ashworth, chief U.S. economist at Capital Economics, said in a note. “It is possible that Fed officials want to downplay the recent two-week closure and the potential for another shutdown early next year because they still intend to begin tapering the asset purchases at the FOMC meeting in December.
The stock market meandered in the minutes after the statement but later dropped precipitously, with the Dow industrials losing close to 100 points at one juncture before finally closing off 61.59 points, a drop of just 0.4 percent.
Bond yields moved higher as well, with the 10-year Treasury near session highs, though the dollar was higher as well.
Some investors interpreted the remarks as at least slightly more hawkish in terms of economic prospects and Fed policy response.
“The Fed is on hold, but the tone of the statement and the failure to bend on account of the government shutdown is very likely to bring forward the market’s timetable of tapering from March where we feel the pendulum has swung too far,” Andrew Wilkinson, chief economic strategist at Miller Tabak, said in a note.
Where once the market had expected a retreat on quantitative easing to begin before the end of 2013, consensus is now that tapering won’t begin until at least March 2014, though that may change now.
In another departure from the last statement, central bank officials noted that the pace of housing recovery “has slowed” and they warned again that “fiscal policy is restraining economic growth.”
“It’s clear the catalyst needed to even discuss tapering again will have to come from significant improvement in the labor market,” said Todd Schoenberger, managing partner at LandColt Capital.
Kurt Karl, chief economist at Swiss Re, said the Fed’s economic outlook is benign enough to suggest that reductions in asset purchases likely will start early in 2014 and conclude by the third quarter. That in turn likely will send the 10-year note to 3.1 percent by 2014, he said.
The Fed has been using the unemployment rate as a benchmark for guiding monetary policy. The rate has been on a steady decline and now stands at 7.2 percent, but much of the move has come to a shrinking labor force rather than robust job gains,.
Moreover, recent reports have indicated a softer market, with the ADP count of private jobs for October showing just 130,000 new positions.