JPM: Tapering Still Coming In September

Tyler Durden's picture


From JPM's Michael Feroli

Tapering vs tightening is only the beginning

Chairman Bernanke's remarks in Boston were dovish on the outlook for interest rates, but did little to counter the notion that tapering will occur relatively soon. In some ways his comments echoed those from earlier in summer and spring: distinguishing the asset purchase policy from the zero rate policy, and emphasizing that decisions on one policy won't necessarily impact decisions for the other policy. However, yesterday his remarks went further, by laying out the reasons for why rates won't rise dramatically in the medium-term. The reason for this subtle change in emphasis is the revised forecasts released after the most recent FOMC meeting, which showed a quicker move down in the unemployment rate. Irrespective of tapering concerns, this change in forecasts makes it harder for the Chairman to argue that rates will be low for a very long time. The approach he took yesterday mirrored some recent Fed research in arguing that the unemployment rate understates the degree of labor market slack. Ultimately, however, the emerging communications challenge was apparent to the FOMC even last year as they debated the threshold guidance: only laying out conditions for the first rate hike is an incomplete means to ensuring accommodative financial conditions, as the market may thereafter price an aggressive path of tightening. In any event, unlike tapering, tightening will likely be a choice for Bernanke's successor, so what he says about the conditions for tightening are only indicative of the thinking that may prevail at that time.
Nothing in yesterday's remarks led us to question our view that tapering in September is coming, conditional on the data cooperating. To the contrary, when asked if he regretted mentioning slowing the pace of purchases recently, he stated that "notwithstanding some volatility that we've seen in the past six weeks, that speaking now and explaining what we're doing may have avoided, you know, a much more difficult situation in another time." Rather than push back against the way his comments were interpreted, the Chairman seemed to welcome the better alignment of the market's view with the Fed's view.
Where things get more interesting is with respect to interest rate policy. Here, as usual, the Chairman distinguished the goals of asset purchase policy -- to get "some near-term momentum" -- from those of interest rate policy, to see the recovery through at least to the point at which the economic thresholds are achieved. Given the tame outlook for inflation, the more relevant threshold is the 6.5% unemployment rate. The most recent FOMC forecasts indicate they expect that to be reached around the end of next year or early 2015. In principle, a change in FOMC forecasts shouldn't alter the market's pricing of the Fed, as Fed growth forecasts haven't been shown to significantly outperform private sector forecasts. The repricing of Fed rate hike expectations suggests that in practice the market believes the Fed is a better forecaster, or else really thinks the Fed reaction function has changed.
Perhaps in part to address this second concern, the Chairman yesterday tried to modulate post-lift-off rate hike expectations. On two occasions he made reference to the inadequacy of the unemployment rate, as it either "overstates the health of our labor market" or "understates the weakness of the labor market." This should be considered in the context of traditional macro models which, in normal times, suggest that the unemployment rate would be near the natural rate, or NAIRU, and the funds rate would be near its neutral rate. The most recent FOMC projections point to a NAIRU of 5.6% and a neutral funds rate of 4.0%. That means, again in the context of traditional macro models, that after the 6.5% threshold is hit, the Fed will need to hike 400bps (or 375bps depending on how you count), for the next 100bp decline in the unemployment rate. One interpretation of Bernanke's comments yesterday is a slight move away from these traditional macro models. In particular, a recent research paper by two senior economists affiliated with the Fed, Chris Erceg and Andy Levin, recommends that in the presence of a depressed labor force participation rate, the funds rate should be kept below neutral even as the unemployment rate gets back toward its natural rate.

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Thu, 07/11/2013 - 15:19 | 3742444 kliguy38
kliguy38's picture

Black september!

Thu, 07/11/2013 - 15:22 | 3742458 THX 1178
THX 1178's picture

Tapering ain't coming because tapering can't come. Unless JPM is letting us know that they are pulling the plug then and there. Anyone think they would really pull the plug?

Thu, 07/11/2013 - 15:24 | 3742461 SheepDog-One
SheepDog-One's picture

What plug is that...Bernank's butt plug, or Liesmans ball gag?

Thu, 07/11/2013 - 15:26 | 3742478 jaap
jaap's picture

Sounds to me like panic at JPM. How is your negative Gold in your safe doing btw?

Thu, 07/11/2013 - 15:32 | 3742501 knukles
knukles's picture

Oh fuck me.  The New Normal Paradigm

Since fundamentals don't matter any more, just befuddle them with bullshit and confusion to make sure the trade tickets get written.

Thu, 07/11/2013 - 15:41 | 3742540 Bay of Pigs
Bay of Pigs's picture

You can't believe anything these guys say. They would throw their own grandmother under the bus to make money.

Thu, 07/11/2013 - 15:57 | 3742601 CheapBastard
CheapBastard's picture

Citi sticking to its $1,800 call and GS $1,545 call.



Thu, 07/11/2013 - 15:46 | 3742561 zorba THE GREEK
zorba THE GREEK's picture

Not only is tapering not coming in September but with the economy sinking

so fast, the Fed will bump it up to 100 billion/month.

That's the official number, most likely the Fed is buying up crap to a much larger degree

than is being reported, they lie to us about everything else, don't they.

The Fed is probably bailing out Europe as I post this.

Thu, 07/11/2013 - 15:49 | 3742570 THX 1178
THX 1178's picture

Thats when the Misesian crack-up boom starts.

Thu, 07/11/2013 - 16:10 | 3742644 onewayticket2
onewayticket2's picture

what message would that send?  we talked taper, but now we're going the opposite direction and now talking "bolster" the $85B.  the diminishing utility of QE would accelerate right along with the number of zeros in ben's monthly burn.


then again, i've heard their pal, krugman say, in essense, "it's not working, so let's do more of it" 

Thu, 07/11/2013 - 17:39 | 3742966 xtop23
xtop23's picture

It would send the exact message that has been percolating through the "market" ever since Benji opened his wang-puffer yesterday.

That he is completely and utterly full of shit, and that the FED is a purely political entity that is 100% boxed into perpetual QE.


Thu, 07/11/2013 - 16:11 | 3742645 onewayticket2
onewayticket2's picture


Thu, 07/11/2013 - 17:35 | 3742960 xtop23
xtop23's picture

Agree with every word except I think it'll be more like $150bn/mo.

Japan has shown the way....go big or go home.

Thu, 07/11/2013 - 19:45 | 3743336 LongBalls
LongBalls's picture

I suppose all that gold is leaving JPM's vault because the wealthy are expecting deflation and a stronger dollar long term? JPM is just talking thier book.

Thu, 07/11/2013 - 15:21 | 3742447 fonzannoon
fonzannoon's picture

Yes the fed is still going to attempt to taper, because they must have to for whatever reason. All Bernanke did yesterday was this


"Because Wall Street has been aggressively short bonds. As a result, their positions got blown out by Bernanke after-hours, no less, a time when it's much more difficult to cover positions.

One furious trader told me he lost $6,000 covering his bond shorts. That loss, he added, would have been far greater had he not been sitting at his trading desk listening to Bernanke and not reacted instantly. "If it was a few seconds later, I would have lost $25,000 instead of $6,000," he said. He has a friend who has lost so much money overnight he won't even pick up the phone."

So the feds exit strategy is to hold everyone else at gunpoint while they creep out of the market. Last night they sprayed a bunch of hostages to prove a point.


Thu, 07/11/2013 - 15:28 | 3742487 Dr. Engali
Dr. Engali's picture

Sucks to be them. I bought a bunch of bonds when they got hammered and now I will be taking chips off the table.

Thu, 07/11/2013 - 15:33 | 3742507 fonzannoon
fonzannoon's picture

Honestly....I don't know what to make of it. We are at he crushed a bunch of shorts and got himself 10bps back from before he spoke. 10bps?

I dare say the next 10bps are the most important of his career. If they are higher, he's got a real problem on his hands. If they are lower then this goes on forever.

Thu, 07/11/2013 - 15:46 | 3742558 Bay of Pigs
Bay of Pigs's picture

Exactly "who" is his problem? Bond "vigilantes"?

LOL...seriously, I don't get it fonz.

Thu, 07/11/2013 - 15:52 | 3742581 fonzannoon
fonzannoon's picture

He is stuck BOP. That is the bottom line. If he actually tries to exit, even just by tapering a little, yields blow out. If he does not taper, he ends up owning all the collateral.

So he tried to tip toe out, a few people ran in front of him, so he sprayed them with a machine gun.

Now everyone is staring at him. If he starts to tip toe out again, more people are going to run, and he will have to spray them again. This is where we are at.

In the meantime, the people who are too stupid to realize what happens if he does not try to exit, will just order another drink and not give a shit what may happen down the road.


Thu, 07/11/2013 - 15:59 | 3742606 Bay of Pigs
Bay of Pigs's picture

He will not exit. Anyone thinking so at this point is an idiot, or loves being mowed down by a machine gun.

No way the FED exits QE in Sept. or at any other time. It is QE4eva until she blows. Tapering is bullshit, much like green shoots and irrational exuberance.

Thu, 07/11/2013 - 16:02 | 3742620 fonzannoon
fonzannoon's picture

I don't think he will exit. I do think he knows that the other option is total catastrophe. I also think he is stupid enough to think he can convince people that him pulling 85 bil a month off the table is not tighteneing, and he will try to prove it.

Thu, 07/11/2013 - 16:45 | 3742781 Herd Redirectio...
Herd Redirection Committee's picture

They aren't going to own all the collateral...  If interest rates keeping going up government interest payments will go through the roof, adding yet another source of deficit spending.

Thu, 07/11/2013 - 18:57 | 3743219 DosZap
DosZap's picture

 I also think he is stupid enough to think he can convince people that him pulling 85 bil a month off the table is not tighteneing, and he will try to prove it.


Well if he DID, Atlantis will have to RAISE from the oceans floor,for there to be any buyers,or maybe the Mayans?.

Thu, 07/11/2013 - 16:07 | 3742639 Dr. Engali
Dr. Engali's picture

Fonz the collateral argument is pure BS. You heard him yourself " There is plenty of collateral out there and we only own a small portion of it". I never bought that argument from the beginning. He can monetize car loans if he has to.

Thu, 07/11/2013 - 16:16 | 3742662 fonzannoon
fonzannoon's picture

agree completely, although when we get there everybody better have their phyz.

Thu, 07/11/2013 - 16:20 | 3742683 Dr. Engali
Dr. Engali's picture

BTW...A quick glance at the fed's balance sheet will show that they are not tapering.

Thu, 07/11/2013 - 16:22 | 3742693 fonzannoon
fonzannoon's picture

the idea that they are tapering is ridiculous. If anything they are blowing the balance sheet out in the shadow market buying the bonds that China or Japan have been dumping/

Thu, 07/11/2013 - 16:19 | 3742675 fuu
fuu's picture

He can monetize pocket lint if he wants to.

Thu, 07/11/2013 - 16:21 | 3742688 fonzannoon
fonzannoon's picture

We are at the stage where he has to try to talk the talk, even though he will never walk the walk. This stage may last a while.

Thu, 07/11/2013 - 16:35 | 3742744 fuu
fuu's picture

The 3rd Bank of the US is going to be the bad bank of last resort.

Thu, 07/11/2013 - 16:26 | 3742712 Dr. Engali
Dr. Engali's picture

I have plenty of that...some belly lint and toe jam as well.

Thu, 07/11/2013 - 16:52 | 3742800 game theory
game theory's picture

I am not entirely sure that the Fed is stuck.  The "taper" is not an "exit" because they are still increasing their holdings.  Eventually it will amount to a reduction in holdings as bonds reach maturity. But the average duration of their holdings is years off. So depending on how they manage their tapered purchases, knowing the actual "exit" date could take a while.

Even if the Fed is "stuck" having trouble managing a smooth transition, ambiguity and uncertainty are like their left and right fists in this fight. My guess is they increase the uncertainty through early 2014...and things will get way weirder than they appear to be now.

Thu, 07/11/2013 - 15:30 | 3742492 NOTW777
NOTW777's picture

purposely planned right after the close;  but earlier in the day when the minutes came out there was a short spike up and then it faded - almost like someone in the know jumped the gun

Thu, 07/11/2013 - 15:50 | 3742574 Cosmicserpent
Cosmicserpent's picture

Spraying the hostages is the new muppet slaying!  Excellent.

Thu, 07/11/2013 - 16:41 | 3742770 Muppetrage
Muppetrage's picture

Oh these poor fellows lost money shorting bonds, say it isn't so.

Thu, 07/11/2013 - 15:20 | 3742448 SheepDog-One
SheepDog-One's picture

Moar 'good cop/bad cop' all day please!

Thu, 07/11/2013 - 15:22 | 3742455 francis_sawyer
francis_sawyer's picture

Fuck these fucking fucks...

Thu, 07/11/2013 - 15:25 | 3742472 Shell Game
Shell Game's picture

Fucking hear, hear...

Thu, 07/11/2013 - 18:51 | 3743204 DosZap
DosZap's picture

 conditional on the data cooperating



Well that is as likely as ice water in Hell.So, Forward QE!!!!.

Thu, 07/11/2013 - 15:24 | 3742466 vote_libertaria...
vote_libertarian_party's picture

Yes, going from $85B to $84.99999999 is 'tapering'.



Thu, 07/11/2013 - 15:26 | 3742481 SheepDog-One
SheepDog-One's picture

Now 'tapering' is just a one has any actual idea what a 'tapering' actually is....just that if it is 'taper' then thats bad, 'no taper' then that's good.

What a clownshow.

Thu, 07/11/2013 - 15:25 | 3742468 SheepDog-One
SheepDog-One's picture

I look at this day to day utter bullshit and knows behind the curtain it must be a real clusterfuck!

Thu, 07/11/2013 - 15:26 | 3742473 Madcow
Madcow's picture

I repeat - the FED won't not not taper for an exteded period of time - not to be extended by a non-extented extentions - if econmic condiions don't not improve within that period of time weather permitting. 

Thu, 07/11/2013 - 15:26 | 3742475 Madcow
Madcow's picture

I repeat - the FED won't not not taper for an exteded period of time - not to be extended by a non-extented extentions - if econmic condiions don't not improve within that period of time weather permitting. 

Thu, 07/11/2013 - 15:27 | 3742485 SheepDog-One
SheepDog-One's picture

The weather....WE know it's ALL about the weather!

Thu, 07/11/2013 - 15:35 | 3742511 knukles
knukles's picture

So that's why they're called

Seasonal Adjustments!


depends on whether they're fudged a lot or little...

Thu, 07/11/2013 - 15:33 | 3742477 CaptainSpaulding
CaptainSpaulding's picture

Does this mean no moar free coffee and left over pastries at my local Chase?

Thu, 07/11/2013 - 15:26 | 3742479 nodhannum
nodhannum's picture

Taper...Crap.  They won't taper because the CAN'T!  Just good cop, bad cop to keep them guessing.

Thu, 07/11/2013 - 15:33 | 3742505 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Debt is running at 68% of last years debt. Less debt, less monetization. Why keep the 85bn a month which was in part paranoia about fiscal cliff, sequester, etc. Unless you want to blow up the bond market at some point. The taper cometh.

Thu, 07/11/2013 - 16:53 | 3742805 Herd Redirectio...
Herd Redirection Committee's picture

The bond market?  Think big.  He will blow up the USD itself.

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