Bernanke May Want to Hint At July Tapering Move Now: Scotiabank

Bernanke May Want to Hint At July Tapering Move Now: Scotiabank

07/10/2013 15:32 -0400

Via Guy Haselmann of Scotiabank,

What Bernanke Might Want to Say

In past speeches, Bernanke has said that central banks should not surprise markets.  However, he has also said that central banks should not threaten action, because the threat is then counter-productive to what they are trying to achieve under current policy.  Therefore, waiting 2.25 months until the September meeting seems impractical to me and counter to earlier speeches. Bernanke can use his speech today to bring clarity to the market, while limiting market damage.  For the reasons mentioned, he may want to hint at an earlier-than-expected tapering (say at the July meeting rather than the September meeting).  At the same time, he may want to emphasize asset purchases may continue for longer than expectations.   Of course, he will also emphasize that tapering is merely a slowing of the rate of purchases (slower easing) and that a rate increase in a long way off.  Trying to extend forward guidance at the same time that he moves forward the initial timing of tapering will help limit an adverse market reaction. One reason the Treasury market priced in a Q4 2014 rate hike – moving the first hike forward by 6 months after the June FOMC – was because the FOMC central tendencies lowered the low end of its unemployment rate forecast for end-2014 to 6.5%, which is the Fed’s target for the first rate hike.  Bernanke may wish to verbally lengthen this assessment. Bernanke may wish to say something about the revised exit strategy guidance paper (from January) that is likely to be released at the July meeting.  The original paper said that QE will likely end 6 months after the first taper and rates will be hiked 6 months after QE ends.  Bernanke may wish to hint that both of these time frames are likely to be extended.   In addition, the FOMC noticed (likely with angst) the rise in mortgage rates.  Bernanke can use this opportunity to emphasize that no Fed mortgage assets will ever be sold (but rather allow to run-off).  The first paper discussed asset sales, but Bernanke said at the June FOMC press conference that the Fed does not intend to sell any mortgages.

Background, Reasoning, and Justification

Bernanke gives a speech today in Boston beginning at 4:10 PM entitled “The First 100 Years of the Federal Reserve: The Policy Record, Lessons Learned, and Prospects for the Future”.  There will be a post-speech ‘Question & Answer’ period.  This is an ideal time for him to fine-tune the Fed’s complicated message to markets.  He can use this opportunity to send up a trial balloon for next week’s semi-annual report to Congress.  I suspect Bernanke could even have his staffers leak questions to ask to those in the audience in order to frame and direct the conversation. I believe the Fed has drifted toward acceptance of tapering because of concerns about: 1) financial instability, 2) asset bubbles and 3) amassing difficulties for its exit strategies, not because economic nirvana has been reached.  The FOMC likely recognizes that economic strength is not ideally where they would like it to be, but they understand that $85 of monthly asset purchases has a greater impact on asset prices than it does on lowering the Unemployment Rate (UR).   Therefore, I believe the decision to taper at one of the next two meeting is almost a certainty.  “Data dependency” will dictate the length and pace of QE, but will no longer delay the tapering start date past the next few months. Bernanke can site “progress” as the reason for tapering.  The UR has fallen from 8.2% to 7.6% and employment has expanded by over 200k jobs per month on average over the last 6 months.  A tapering announcement would afford the FOMC the opportunity to get all members on the same, increase their flexibility going forward, and remove it as an uncertainty overhanging markets.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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