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Goldman Issues Q&A On Tapering: Says "Not Yet"

Tyler Durden's picture





 

On one hand we have bad Hilsenrath sending mixed messages saying the Fed may taper sooner (with good Hilsenrath chiming in days later, adding it may be later after all), depending on whether HY bonds hit 4% YTM by EOD or mid next week at the latest. On the other, even resolute Fed doves are whispering that a tapering may occur as soon the summer, so in a few months, and halt QE by year end. Bottom line - confusion. So who better to arbitrate than the firm that runs it all, Goldman Sachs, and its chief economist Jan Hatzius, who issues the following Q&A on "tapering." His view: "not yet." Then again, Goldman is the consummate (ab)user of dodecatuple reverse psychology, so if Goldman says "all clear" the natural response should be just as clear.

From Goldman Sachs' Jan Hatzius:

Q&A on Fed Tapering: Not Yet

Q: What are your forecasts for the future of the Fed’s QE program?

A: We expect continued purchases at a $85bn/month pace through 2013, followed by a gradual tapering process toward zero that starts in 2014Q1—presumably announced at the December 2013 FOMC meeting—and ends in 2014Q3. This is based on our forecast that real GDP will grow 2% in Q2/Q3 and 2.5% in Q4, the unemployment rate will fall to 7.3% by the end of 2013, and core PCE inflation will edge up a bit to 1.3% year-on-year by Q4.

Q: How do you see the risks around this central forecast?

A: Roughly evenly balanced between an earlier and a later move. It is likely that the FOMC will want to announce the first reduction in the pace of QE at a meeting followed by a press conference, so that the Chairman can explain the context of the decision. The next four press conferences are scheduled for June 19, September 18, December 18, and March 19. In our view, a tapering announcement is highly unlikely for June 19, possible for September 18, most likely for December 18, and also possible for March 19 (or potentially even later). All of this will, of course, depend first and foremost on the output, employment, and inflation data.

Q: Have you increased your probability of an early tapering step—say, before the September meeting—over the past few months?

A: No. Such a step would imply a hawkish shift at a time when the incoming information has, if anything, pushed in the other direction. As of the March 19-20 meeting, it seems that the median committee member believes that “…if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end.” We believe that “later in the year” means no earlier than the July or—more likely if a press conference is required—September FOMC meeting.

Since the March meeting, economic activity has, on balance, disappointed expectations. Although the weakness in the employment and retail sales reports for March was reversed in the reports for April, the US manufacturing sector continues to slow, with declines in industrial production in April and the NY Empire State and Philly Fed reports in May. Moreover, the latest spike in initial jobless claims raises at least some questions about whether the downward trend in claims that was previously evident is still in place.

Perhaps more importantly, inflation has continued to fall in recent months. Following the lower-than-expected April CPI report, we estimate that the core PCE index slowed to 1.0% year-on-year in April. Although other indicators of the underlying inflation trend have been consistent with slightly higher inflation, our core inflation “tracker” now stands at an estimated 1.3% for April, clearly below the 2% target.

Q: So you don’t read much into the recent increase in press and market chatter about tapering?

A: Not really. A significant part of this chatter seems to be based on an article by Jon Hilsenrath in the Wall Street Journal on Friday evening. But although the headline “Fed Maps Exit from Stimulus” sounded dramatic, the article itself contained little new information on the key question, namely the timing of any tapering moves. It merely stated that ”some” Fed officials "can envision" taking the first step toward tapering soon. This has been clear for many months; in fact, “some” Fed officials have been uncomfortable with the program from the get-go and would of course like to end it as soon as possible.

Q: But didn’t the Hilsenrath article provide quite a lot of information about the shape of the exit process, i.e. the likelihood that the sequencing of the QE tapering will be very sensitive to economic conditions?

A: Again, not really. The FOMC has been trying for a while—going back at least as far as the March press conference and continuing through the May 1 statement—to convince market participants that the tapering process will be less "deterministic" than many have been thinking. The purpose is probably to reduce the extent to which market participants would extrapolate forward a small reduction in the QE pace at one meeting into additional reductions at subsequent meetings.

But even this point needs to be qualified. In our view, Fed officials have an incentive to portray the tapering process as less deterministic than it is likely to be in reality. Uncertainty about whether an initial tapering step foreshadows additional steps at subsequent meetings would probably keep the initial tightening in financial conditions more limited. This would be desirable from the Fed’s perspective. For this reason, we would take the FOMC’s signals on this issue with a grain of salt.

Q: Where does the recent Fedspeak fit in?

A: We have not received a lot of new information since the May 1 statement, which was quite similar to the prior March 18 statement. Perhaps the most interesting update came from a speech on May 16 by San Francisco Fed President Williams. He remains less enthusiastic about continuing the QE program than we would have expected a few months ago: "[A]ssuming my economic forecast holds true and various labor market indicators continue to register appreciable improvement in coming months, we could reduce somewhat the pace of our securities purchases, perhaps as early as this summer. Then, if all goes as hoped, we could end the purchase program sometime late this year." This was only slightly softer than his remarks on April 3: "[A]ssuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer. If that happens, we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year."

Ultimately, however, it is the leadership whose signals will carry the most weight. We are therefore particularly focused on the upcoming testimony by Chairman Bernanke to the Joint Economic Committee of Congress on May 22. We expect a somewhat softer message than that from President Williams.

Q: Some commentators argue that the rapid decline in the federal budget deficit may prompt the Fed to taper earlier than they otherwise would have done. Do you agree with this?

A: No. This argument seems to be based on the implicit assumption that the purpose of the QE program is, at least partly, to finance the federal deficit. Fed officials would take strong exception to this notion. In fact, if we accept the notion that QE affects financial conditions and economic activity mainly via the stock of securities held, rather than the flow of issuance absorbed, there is no obvious link between the size of the deficit and the pace of asset purchases. A smaller deficit could call for a smaller QE program if it was mainly due to a stronger economy; but it could likewise call for a larger QE program if it was mainly due to greater fiscal drag. In practice, it is probably due to a combination of both factors, and we do not believe that it has substantial implications for Fed policy.

Q: So what could get Fed officials to increase the size of the QE program, either through a later beginning to the tapering process (say, March 2014) or a higher run rate of purchases?

A: Such a decision would probably be due to a combination of weaker job market data and lower inflation. We think that the hurdle for increasing the size of the purchase program is significantly higher. It would probably require either a clear downturn in the economy with a renewed risk of recession or a substantial decline in core PCE and CPI inflation as well as inflation expectations. But the hurdle for pushing out the date of the initial tapering may not be that high. If the labor market and economic recovery remained a little more sluggish than our forecast and underlying inflation trends moved any lower than the current 1¼% rate, we believe that the start date would move into 2014, with an announcement at the March meeting or later.

Q: Will they taper Treasury or mortgage QE first?

A: We think they will disproportionately taper the Treasury purchases, as there is a widespread belief that the stimulative per-dollar effect of MBS purchases is larger. According to the March FOMC minutes, “[a] few participants felt that MBS purchases provided more support to the economy than purchases of longer-term Treasury securities because they stimulated the housing sector directly.” Although the minutes also note that “a few preferred to focus any purchases in the Treasury market to avoid allocating credit to a specific sector of the economy,” the former group is likely to be closer to the views of the FOMC leadership.

 


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Fri, 05/17/2013 - 10:34 | Link to Comment fonzannoon
fonzannoon's picture

Translated: "we are not completely out yet so please give us a bit more time before the dump"

Fri, 05/17/2013 - 10:46 | Link to Comment HedgeAccordingly
HedgeAccordingly's picture

trust no 1!! -  The Trade for Profit Morning Letter for Friday May 17, 2013  http://hedge.ly/14bYegE

Fri, 05/17/2013 - 10:56 | Link to Comment NotApplicable
NotApplicable's picture

Hilsenrat sending mixed messages?

Color me shocked.

Fri, 05/17/2013 - 13:25 | Link to Comment Panafrican Funk...
Panafrican Funktron Robot's picture

Love the headfake at the end re: MBS tapering vs. UST tapering.  There really isn't much MBS left to buy.  I see the Fed decreasing (or even eliminating) MBS purchases and increasing UST purchases, for a "net tightening" that actually makes the UST floor and subsequent equity ramps more prominent.  The counter is that they are bumping up against a regulatory allocation limit with UST's as a percentage of total Fed holdings, but regulatory allocation limits can be breached in "extraordinary circumstances".  Like Bernanke continuing to breathe, for example.

Fri, 05/17/2013 - 15:41 | Link to Comment PiltdownMan
Fri, 05/17/2013 - 10:36 | Link to Comment Sutton
Sutton's picture

"A tapering may appear by mid-year."

June 30?   Today is May 17.

I don't see it.

Fri, 05/17/2013 - 10:47 | Link to Comment Arius
Arius's picture

"We expect continued purchases at a $85bn/month pace through 2013, followed by a gradual tapering process toward zero that starts in 2014Q1—presumably announced at the December 2013 FOMC meeting—and ends in 2014Q3."

first Q, meaning never really ... and be serious how can they???

Fri, 05/17/2013 - 10:38 | Link to Comment HD
HD's picture

Goldman gets a call anytime Ben takes a piss let alone changes Fed policy. They know exactly what will happen and when. The idea they have to analyze or speculate is HILARIOUS.

Fri, 05/17/2013 - 11:13 | Link to Comment semperfi
semperfi's picture

Anyone who believes anything these criminals utter in public is a drooling boob.

Fri, 05/17/2013 - 10:40 | Link to Comment Dr. Engali
Dr. Engali's picture

We havn't instructed the Bernank to start buying equities outright yet. Once we are completey loaded up we will instruct him on how he to expand QE  from 85 billion to 120 billion next year.

Fri, 05/17/2013 - 10:39 | Link to Comment Bearwagon
Bearwagon's picture

The result of applying the regular fivefold inverse psychology on this particular Goldsack statement would be immediate tapering. Watch out!

Fri, 05/17/2013 - 10:57 | Link to Comment The Thunder Child
The Thunder Child's picture

Where is the poison? The battle of wits has begun..

Fri, 05/17/2013 - 10:41 | Link to Comment HD
HD's picture

"there is no obvious link between the size of the deficit and the pace of asset purchases."

Again with the jokes. These Goldman guys know funny.

 

Fri, 05/17/2013 - 10:44 | Link to Comment Dr. Engali
Dr. Engali's picture

"No. This argument seems to be based on the implicit assumption that the purpose of the QE program is, at least partly, to finance the federal deficit. Fed officials would take strong exception to this notion."

 

Are you kidding me? Disguising your purchases behind the bait and switch through primary dealers doesn't mean it's not happening.What a freaking Joke!

Fri, 05/17/2013 - 10:47 | Link to Comment Bearwagon
Bearwagon's picture

"Now you see it ... now you don't!" (Of course they are kidding you.)

Fri, 05/17/2013 - 10:44 | Link to Comment SheepDog-One
SheepDog-One's picture

When the 'tapering' starts, all account balances will be Corzined before you can hit the 'sell' button.

Fri, 05/17/2013 - 10:47 | Link to Comment fonzannoon
fonzannoon's picture

It's funny I was always told the market is a forward looking mechanism. So even the fed has now told us that going forward, they are ending QE. Yet the market does not price that in ahead of time.....

Fri, 05/17/2013 - 10:56 | Link to Comment The Master
The Master's picture

Actions speak louder than words.  Until they actually announce tapering formally, no one believes them.  They have NO CREDIBIILITY.

Fri, 05/17/2013 - 10:59 | Link to Comment fonzannoon
fonzannoon's picture

They have plenty of credibility from the people on the early distribution list, and they have already been notified of what will or won't happen.

Fri, 05/17/2013 - 10:46 | Link to Comment SheepDog-One
SheepDog-One's picture

QE tapering can't stop yet....obviously they've got moar +100 days to string together yet.

Fri, 05/17/2013 - 10:50 | Link to Comment Headbanger
Fri, 05/17/2013 - 11:00 | Link to Comment fonzannoon
fonzannoon's picture

Headbanger, here is what makes that article retarded. What difference does it make if they taper in June, Sept, or January? If the idea is that when they stop QE, all hell breaks loose....why not GTFO right now and let everyone else pick up their pennies?

So either we are being completely lied to and QE will never even take a break and the big guys know it. Or the big guys have already gotten out of the way and are now trying to wake the sheep up so they can watch them sell into a bidless market.

There is no way the fed says "we stop Sept 1st" and the market rallies until august 31st.

Fri, 05/17/2013 - 11:08 | Link to Comment semperfi
semperfi's picture

"When it gets serious, you have to lie"  -Juncker

Fri, 05/17/2013 - 12:20 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Indeed, hey goldman, your .gov puppets need you to buy some treasuries ASAP;

 

BOOM motherfuckers;  http://www.marketwatch.com/investing/bond/10_year

Ben would have done better to drop cash from a helicopter at this point.  He's got the printer, but we control velocity.    Just like the E.U. the governments must remain funded at all costs, Including WWIII, if necessary.


 

Fri, 05/17/2013 - 11:10 | Link to Comment Headbanger
Headbanger's picture

I agree it's retarded. The answer to your question is simple greed and the funds wanting to squeeze every last drop of margin out of the markets cause they all know this is the end of many careers on Wall St.

Fri, 05/17/2013 - 10:50 | Link to Comment B2u
B2u's picture

QE has FAILED except to help Wall Street and HFT.  Goldman Sucks doesn't want the punch bowl removed until they know ahead of time.

 

From the article:

Since the March meeting, economic activity has, on balance, disappointed expectations. Although the weakness in the employment and retail sales reports for March was reversed in the reports for April, the US manufacturing sector continues to slow, with declines in industrial production in April and the NY Empire State and Philly Fed reports in May. Moreover, the latest spike in initial jobless claims raises at least some questions about whether the downward trend in claims that was previously evident is still in place.

Fri, 05/17/2013 - 15:40 | Link to Comment sgorem
sgorem's picture

+++++

Fri, 05/17/2013 - 10:51 | Link to Comment Father Lucifer
Father Lucifer's picture

No risk here, God I sure feel confident now.

Fri, 05/17/2013 - 10:55 | Link to Comment ParkAveFlasher
ParkAveFlasher's picture

THEY CAN NOT TAPER YET.  THERE IS A SHORTAGE OF TOILET PAPER.

Fri, 05/17/2013 - 10:58 | Link to Comment Bearwagon
Bearwagon's picture

Just add some zeros. Problem solved!

Fri, 05/17/2013 - 11:13 | Link to Comment ParkAveFlasher
ParkAveFlasher's picture

They will keep plopping zeros until they are sitting on an enormous pile of excrement larger than the house itself, and from that lofty view, no amount of paper will do them any good.

It SHOCKS me how well the analogy applies.  Defecation is to water as money printing is to the economy.

Fri, 05/17/2013 - 11:03 | Link to Comment Kina
Kina's picture

Some commentators argue that the rapid decline in the federal budget deficit...

 

Huh?

 

:/

 

News for these guys....first comes a depression...or haven't they noticed the contraction of the world and the USD strengthening?

Fri, 05/17/2013 - 11:06 | Link to Comment semperfi
semperfi's picture

Anyone who thinks the money printing is going to stop is a moron.  They may be able to, as a symbollic jesture, slow it a bit, but then ramp it back up when their centrally-controlled universe starts to implode again.  If they stop, their whole universe implodes, they are out of money, out of power, out of prestige, out of everything, done, finished.  Anyone who thinks the Bankster Cabal is willing to give all that up is an utter, complete, drooling boob.

Fri, 05/17/2013 - 11:09 | Link to Comment Everybodys All ...
Everybodys All American's picture

Gold and silver if they bounce off of recent lows will let us know if QE is about to end or not. Pay attention we are right near those lows.

Fri, 05/17/2013 - 11:09 | Link to Comment semperfi
semperfi's picture

Nope - This is a free-market principle.  The only free markets now are the black markets.

Fri, 05/17/2013 - 11:12 | Link to Comment Everybodys All ...
Everybodys All American's picture

Take a look at the recent dollar strength as well These are all relevant forecasts even in what I agree are suspect markets.

Fri, 05/17/2013 - 11:16 | Link to Comment Dewey Cheatum Howe
Dewey Cheatum Howe's picture

"this is based on our forecast that real GDP will grow 2% in Q2/Q3 and 2.5% in Q4"

I wonder if he includes this into his GDP calculations.

http://www.zerohedge.com/news/2013-04-21/us-gdp-will-be-revised-higher-5...

Means the Nominal bullshit GDP number should grow by about 5% in Q2/Q3 when it goes into effect and the usual everything is sunshine and unicorns press bullshit to follow.

 

Fri, 05/17/2013 - 11:29 | Link to Comment Everybodys All ...
Everybodys All American's picture

GDP will eventually mean as little to the economy as the U of M consumer confidence number. Why they are doing this is obvious but it will backfire.

Fri, 05/17/2013 - 11:17 | Link to Comment Vooter
Vooter's picture

LOL...what a complete and utter CROCK OF SHIT. Can we just start building the gallows now to avoid the rush later?

Fri, 05/17/2013 - 14:49 | Link to Comment metaforge
metaforge's picture

Works for me - I'm long GLWS.

Fri, 05/17/2013 - 15:39 | Link to Comment sgorem
sgorem's picture

@ the Vooter.......+1000

Fri, 05/17/2013 - 11:24 | Link to Comment optionsman
optionsman's picture

inflation will slow further towards the end of the year. not sure about the labor market conditions. IMHO the labor market is really weak but the assessment is partly based in my expectations of what a healthy labor market looks like. perhaps I am wrong. either way I dont expect a resounding support from neither inflation nor from labor markets for an all clear sound to taper. IMHO they will not taper at all. ECB continues to talk further rate cuts and other stimulative measures. the rest of the world is basically on this bandwagon. for the Fed to taper in this environment is to strengthen the USD much further. that of course brings with it certain consequences allbeit with a lag ;) but nonetheless anticipated by the "markets".

just saying.....

Fri, 05/17/2013 - 12:13 | Link to Comment Clowns on Acid
Clowns on Acid's picture

I wonder how many businesses in Detroit were in the Univ of Michigan survey?

Even the squids @ GS have to realize that the equity market is on fumes and it just doesn't look good to the sheeple. The sheeple might wake up if equities continue their hyper parabolic ascent. 

The only thing that will be "tapered" is the hyper parabolic ascent. I mean c'mon the US isn't Zimbabwe is it ?

Fri, 05/17/2013 - 14:01 | Link to Comment venturen
venturen's picture

Who thinks Goldman will ever authorize the FED to stop printing? Are you kidding...they have never had it better...Obama is following his commands and they keep accumulating all the wealth....moving it to offshore tax protected entities to do their trading. Until the people vote someone in with backbone...it is just going to get worse.

Fri, 05/17/2013 - 15:37 | Link to Comment sgorem
sgorem's picture

+1000

Fri, 05/17/2013 - 15:22 | Link to Comment Carl LaFong
Carl LaFong's picture

What a con job. "Tapering" will immediately send the economy into a tailspin and crash the bond market. The pravda media and fascist government / Fed mouthpieces are doing a great job of keeping everybody's eye off the ball. You gotta respect these crooks. They actually have people believing in a "recovery" and happily keeping their money in FDIC "guaranteed" banks and government sponsored retirement accounts. The stock market will continue to go up ... until one day it doesn't. Gold will be repressed until one day it isn't. With virtual electronic bitcoins and massive electronic and paper fiat creation, why should anybody distrust government or the banks? After all, "The moar monee they print, the moar it's worth." Makes sense to me.

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