Why The Fed Won’t Taper In December

Tyler Durden's picture

Submitted by F.F. Wiley of Cyniconomics


  • To gauge the likelihood of a December taper, we should think through the changes that might occur in the first paragraph of the FOMC’s statement, which is always a brief assessment of the state of the economy.
  • While the committee will surely tweak its language on account of last week’s strong jobs data, we’ll see downgrades in other parts of its assessment, which should include a reference to weaker business investment growth and possibly a renewed warning about rising mortgage rates.
  • The committee should also be concerned about holiday spending after seeing rapid inventory accumulation in Q3 GDP and other indicators.
  • Inventory and spending concerns may not be recognized in the statement, but they’ll add to the case to let the dust settle on the fourth quarter before changing existing policies.
  • We expect the tapering decision to be deferred to the next meeting once again.

Thinking like the Fed

To know your enemy, you must become your enemy  -Sun Tzu

In war, poker, chess and many other endeavors, wise old hands will advise you to think like your opponent. We’ll try a related idea here by seeing if we can think like the members of the Federal Open Market Committee (FOMC). Specifically, we’ll pretend to write part of the statement for the FOMC’s December 17/18 meeting.

We’ll work through the four or five sentences in the statement’s first paragraph that sum up the committee’s thoughts on recent developments. When the FOMC makes a policy change, it’s always linked to these four or five sentences. Here’s what they said in the last statement (for the meeting on October 29/30):

Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated. Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth. Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.

As you may know, there are at least five pieces to this section: employment, household spending, business investment, housing and inflation. In addition, sometimes factors outside the big five become important enough to make a special appearance. For example, every one of the last six statements included a sentence on fiscal restraint.

We’ll look at each area in up to four steps: old language, new information, comparison and new language. Here are the questions we’re trying to answer:

  • Old language: What did the last two statements say? (We’re including the September 18-19 statement because of the surprising decision not to “taper” the Fed’s monthly security purchases and the fact that it was described as a “close call.”)
  • New information: What have we learned since the September non-taper?
  • Comparison: In view of the new information, how does today’s economy compare to the September 18-19 economy?
  • New language: What will December’s statement say?

Once we’ve covered each area, beginning with employment below, we’ll explain why our answers tell us to expect another non-taper.


Old language (October): “Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated.”

Old language (September): “Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated.”

New information:

  • Non-farm payroll gains averaged 193K in the last three months (September through November), which is well above the three month averages at either of the last two meetings (148K as of September and 143K as of October). The recent figures included two consecutive gains of over 200K: 200K exactly in October and 203K in November. In addition, the August print was revised upward twice, from 169K to 193K to 238K.
  • The household survey tells a different story. The labor force expanded in September while 133K jobs were added, nudging the unemployment rate from 7.3% as of September’s meeting to 7.2% as of October’s meeting. That was a “good” drop in the unemployment rate because it coincided with a growing labor force. Since then, only 83K jobs were added while the labor force shrank by 265K (combining October and November to smooth out government shutdown distortions). Without the labor force shrinkage, the unemployment rate would have held steady at 7.2%. With the shrinkage, it fell to 7.0%. That was a “bad” drop in the unemployment rate because it had nothing to do with new jobs.
  • Employment components of the ISM indices were mixed. The manufacturing index’s employment component reached a 1½ year high in November, while the same component of the non-manufacturing index fell to a 6-month low.

Comparison: Nonfarm payrolls strengthened considerably, but these gains aren’t corroborated by the household survey.

New language: The committee is likely to either restore September’s “shown further improvement” (dropping the qualifier “some” from October’s statement) or upgrade the language even more by mentioning an increased pace of hiring. On the other hand, the household survey’s disturbing trends may warrant an extra qualifier. The part about the unemployment rate remaining “elevated” will appear for the 18th consecutive time.

Household spending

Old language (last 8 meetings): “Household spending advanced.”

New information:

  • The Q3 GDP report showed household spending growth slipping to 1.4% from a 2.0% trend over the past few years (Q1 2011 through Q2 2013). This is the lowest quarterly print since 2009.
  • Spending growth appeared to pick up slightly in October, however, based on Friday’s report showing a 0.3% monthly gain in real personal consumption.
  • Preliminary holiday spending reports are tepid at best.
  • Monthly car sales averaged 15.6K units in the data released after September’s meeting (for September through November), which is down 1.9% from the monthly average of 15.9K in the prior three months.

Comparison: While the data looks weaker than it did at September’s meeting, the holiday season is the most important piece and still uncertain.

New language: There’s a small chance that they’ll downgrade the language to say that the rate of spending growth has slowed. For this to happen, the December 12 retail sales report would need to be weak. Otherwise, expect to see “household spending advanced” once again.

Business investment

Old language (last 7 meetings): “Business fixed investment advanced.”

New information:

  • The Q3 GDP report showed business equipment spending falling slightly (-0.04%). This is only the second negative print since 2009.
  • Not only was the third quarter weak, but fourth quarter equipment spending also got off to a poor start. October’s figure for non-defense durable goods ex-aircraft spending, which is used in GDP calculations, was 1.1% below the third quarter average.
  • Business spending on structures grew at a 13.7% annual rate in Q3, down from the 17.6% Q2 print but still strong. This is the smallest and most volatile piece of business fixed investment, though, as shown by the year-to-date 2013 data, which includes a drop of 25.7% (annualized) in Q1.
  • Like equipment spending, spending on structures is also off to a weak start in the fourth quarter. October’s figure for nonresidential construction spending was 1.1% below the third quarter average.

Comparison: Recent data paints a much weaker picture than at September’s meeting, when the only weak spot was a single month’s data (for July) from the durable goods report.

New language: Expect the new wording to be similar to “growth in business fixed investment has slowed,” which was the language used in December 2012 after the last drop in business equipment spending.


Old language (October): “The recovery in the housing sector slowed somewhat in recent months.”

Old language (September): “The housing sector has been strengthening but mortgage rates have risen further.”

New information:

  • The Q3 GDP report showed residential construction expanding at a 13% annual rate, the fifth consecutive quarter of double-digit annualized growth.
  • The NAHB Housing Market Index has fallen to 54 from 58 prior to September’s meeting and 55 prior to October’s meeting. The November release is due on December 17.
  • Housing permits averaged 978K in the last three months (August through October), bouncing back from a three month average of 933K as of each of the last two meetings. Almost all of the fluctuation has been in multi-family units.
  • Although the preliminary new home sales release for October was strong at 444K, the last three months averaged only 392K. This is lower than the three month averages at either of the last two meetings (429K as of September and 422K as of October).
  • The NAR’s Pending Home Sales Index has fallen for five consecutive months.
  • 30-year mortgage rates climbed to 4.46% this week, up from 4.10% in the week of October’s meeting and nearly back to the 4.50% of the week of September’s meeting.
  • Housing starts data is conspicuously absent due to the government shutdown, with data for September, October and November due to be released for the first time on December 18.

Comparison: Permits recovered since the last two meetings, but new home sales were disappointing apart from October’s reading. The Housing Market Index and Pending Home Sales Index also weakened. Mortgage rates are rising once again, which will surely get the committee’s attention.

New language: Expect a newly worded housing sentence that retains the cautionary tone of the recent statements. If mortgages rates remain above 4.5%, they’ll probably restore September’s qualifier about rising rates. If rates continue to rise AND the mid-December releases (NAHB index, starts and permits) are weak, the new language should be a clear downgrade from the last two statements.

Fiscal restraint

Old language (last 5 meetings): “Fiscal policy is restraining economic growth.”

New information: The effects of fiscal measures enacted early this year (the tax hike and sequester) will gradually diminish. While new measures could be agreed at any time as budget negotiations continue, fiscal drag isn’t likely to be as severe as it was in the 2013 fiscal year.

New language: The old language could and probably should be softened this month. They could add a qualifier to indicate that the effects are diminishing or eliminate the sentence altogether (less likely).


Old language (October and September): “Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.”

New information: Core PCE inflation (the FOMC’s preferred measure) fell from 1.2% as of September’s meeting to 1.1% currently.

New language: Same as the old language.

Bottom line

The statement will be upgraded in parts but with a few downgrades mixed in. Overall, it’ll be less sanguine than you might expect if you’ve only been scanning headlines and watching financial television. It’ll reflect disappointing data in areas that haven’t received as much attention as, say, the nonfarm payrolls report, which caused many pundits to forecast a December taper. These more disappointing areas include business investment, mortgage rates and the shrinking labor force.

Based on the balance of upgrades and downgrades, some FOMC members will surely caution against an overreaction to a few months of 200,000+ (barely!) nonfarm payroll gains. They’ll also consider the huge inventory build shown in this year’s GDP reports, which may not be mentioned in the statement but should be part of the discussion. Not only do rising inventories help to explain the consensus outlook for weak Q4 GDP growth, but they also present risks for 2014.

What’s more, it’s hard to judge the fourth quarter without the full picture on holiday spending, which isn’t yet available. The importance of holiday spending makes mid-December an awkward time to form conclusions about the economy’s direction, and that’s especially true this year due to the government shutdown and late Thanksgiving. Some FOMC members will want to wait for the dust to settle on the fourth quarter before making policy changes.

Taken together, these factors suggest another non-taper in December .  If we’re right, the spotlight on January’s meeting – which already features Ben Bernanke’s exit, Janet Yellen’s new role and a new set of voters – will be even brighter.

Note:  The conclusions above describe our assessment of how the Fed will approach its December decision, not our own recommendation.  We’ve offered our own policy perspectives in many other articles, such as here.

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Colonel Klink's picture

"To think like your enemy".  I have trouble thinking that evil, and the ability to screw my fellow man with ZERO regard.

Guess I'll have to keep dreaming of rope and lamp posts.

Derezzed's picture

Why the Fed won't taper ... Ever.

Let me say it again Ever. As I have said before, in this path, there is no turning back, no limit, and the limit when it comes will be the ultimate physical limit of money so to speak.

We are going all through the end of ruine ! Total oblivion

Stuart's picture

Any meaningful taper is off the table unless the Treasury finds a buyer to replace the Fed for its bonds.   The Treasury CANNOT afford a rise in longer term interest rates, period.  That IS the issue here.  The rest is peripheral.  Good thing for the Treasury Japan decided to print as much as they did, when they did and funnel a good portion of that into the treasury market.  Coincidence...think not.  No doubt the BOJ discussed this with the Treasury & the Fed.   They was needed to counter the EU banks repatriating treasury purchases as part of the EU banking refinancings. 

garypaul's picture

Occident Mortal's comment at 11:02 below is correct to point out the different nature of the sell-off this time (and how I'm getting screwed on my TBT lol)

But I think he's wrong about tapering soon.

Headbanger's picture

The Occident is right on dude!    But also,  to repeat what I said here numerous times before


Who do you think OWNS the Federal Reserve's balance sheet??  The Big Banks!

Occident Mortal's picture

Come on people the primary economic indicator for the FOMC is the yield curve.


Spread between 2yr and 20yr






Spread between 3 yr and 30yr






The curve is now circa 25bps steeper than it was in September. Their primary indicator (the yield curve) has significantly improved since September.

They will taper very soon.

Since mid November the yield curve is steeper than it has been at any time since 2011. Financial asset prices are in blue sky territory, corporations are cash rich and banks have excess reserves deposited at the Fed everyone is sitting on a big cushion, and now the yield curve is steep and steepening. All the boxes are ticked.

They will tighten soon. Starting with a glide path for winding down QE. It's just another credit cycle, albeit a big one. It's no different to 2008.

farmboy's picture

This is the only valid observation why they will not taper ever. There is no real demand for Treasuries, think of the panic if markets realize that.

Stuart's picture

Not in any material way for sure.  Agreed.  But they are engaged in a full bore psychology war to keep the market guessing and keep money moving into the stockmarket as part of that.   Most are invested in the stockmarket, not commodities.  So public confidence is tied much more to stock market.  If it craters, it'll turn ugly.  He who controls the mob controls Rome.  Different city, same logic applies IMHO.

NihilistZero's picture

This is why I expect Housing Bubble 2.0 to bust before a stock market correction.  The real estate market is affected in real ways when income can't support cap rates on rentals.  The numbers still matter.  In QE stock world all the traditional valuation metrics are out the window.  PE ratios are moot when the liquidity spigot is wide open.

Teddy Tenpole's picture



Treasuries get tapered, not MBs ;)

NihilistZero's picture

Whether the MBS gets tapered is irrelevant to my thesis.  The only mortgages being originated in the bubble markets are going to "greater fools".  If anything the FEDs appetite for MBS will require a lowering of lending standards (which Bernanke lobbied for and is already happening) which will only hasten the bubbles popping.

KickIce's picture

Rothschild 101, inflate then deflate.

They're going to pull the rug out at some point,buy the world for a song and then introduce a new currency to satisfy the masses. Unfortunately, by then we will all be renters.

ZH Snob's picture

OK, let's think like the FED (behind closed doors)

congratulations, boys, our 100 year plan is nearly complete.  our European branch has them all going down like dominoes.  and you know, the funny thing is war after war, depression after depression we keep succeeding in getting them to blame their governments.  these useless eaters are so entirely clueless they still haven't put it together that we run their countries, not their governments.  it's the same thing here but even easier.  we've managed to hypnotize these idiots with television, new phones every week and all kinds of crap they fight over at Walmarts.  by the time we've bought all their assets with the very same paper we print for them and finally pull the plug, once we've bankrupted the entire world, they'll never look our way and we'll be safe and sound.  like usual they'll go after each other, start wars, overthrow goverments, and dontcha know, we'll be right there with the new solution to their apocalyptic mess.  now if you look at this powerpoint here is the plan we will present to them...

All Risk No Reward's picture

They will taper, but the play looks like they will create the environment that forces the taper.

They'll pretend like they are forced to taper.

All you folks that think the people with all the money and all the debt paper are going to hyperinflate while they are in that paper are simply lacking in rudimentary self interested economic incentives when it comes to the dElites.

They are going to break the back of this MOFO, all the while playing the role of the savior... "give me a little more and we'll fix it... promise this time!"

And all my antagonistic friends and family will avoid the h*ll out of me because I made sure their blood would be in their own hands and not out of ignorance.

They control the Fed, they own trillions in dollars and trillions more in debt.

Would you hyperinflate?

What you have been told is government is a bunch of Biggest Finance Capital sycophants falling all over themselves to slob the Biggest Finance Capital nob first in line...  so they don't have to go last.

WHO finances politicians?

WHO promotes politicans?

WHO takes care of politicians with $1,000,000 a year gigs and $200k speaking engagements?

WHO do you think runs this MOFO?

The good news is that the same answer works for any outcome - so being wrong isn't a big deal.


Occident Mortal's picture

I think they will taper soon.

They have said nothing to suggest the taper has been delayed indefinitely.

Also the recent bond sell off is different to the May sell off, it's the other end of the curve selling off this time. The bond market is responding how they wanted it to this time. It's on.

Ham-bone's picture

if a taper was seriously coming it would be seen in an equity selloff and a strong bid for treasuries sending treasurys back to sub 2%...the great rotation would be out of stocks and into treasuries. 

Colonel Klink's picture

Or the great rotation would be into bitcoin, because we all know what a store of value it is!


Harlequin001's picture

Now come on, no one's that fucking stupid. Are they?

Only central banks do that...

Occident Mortal's picture

Why would you expect Treasuries to be bid when the Fed starts tapering?

The Fed buys 75% of all the coupons at the moment. Yet you expect Treasuries to rally once the Fed slows their buying!?

That's just silly.

Ham-bone's picture

silly or not that is exactly what has happened every time "tapering" took place from QE1, QE2, etc.  "Money" always goes somewhere...and in a equity selloff institutions and large funds have very few options to ride out the slide...someplace to hide out til the equities are through the shit storm of "tapering"...the Fed's buying of bonds is not pushing rates down but the stock market up.  In a depression, Treasury's yield of 2% would be much more appreciated than a retest of S&P 666.

The Fed's buying of all new Treasury issuance and quite a bit of rollover is retiring "an sset class" (likely never to be seen again), barring any new money from going into this class of "investments" while creating new money that is forced into stocks, RE, CRE...Equities record leverage and record highs aren't exactly saying taper is a coming...

Since '00 $9 T in US new public debt created (of $12 T total)...domestic ownership (ex Fed) has remained steady @ $2.5 T...while Fed has increased to own 20% while foreigners increased to own 50%.  Guess what domestic institutions (insurers, pension funds, etc.) hold now...lots and lots of stocks because there is no yield elsewhere. and they must find some means of getting closer to their 5-8% planned returns.  If the Fed says taper it isn't simply a one time cut but effectively a commitment to end QE (to zero)...every holder of stock that can sell would sell to protect massive gains and protect themselves from their incredibly risky (risky ex-Fed purchases) stock exposure...and they would ROTATE to Treasury's.

garypaul's picture

"Also the recent bond sell off is different to the May sell off, it's the other end of the curve selling off this time."

TBT is Bullshit!

All Risk No Reward's picture

Negative GDP when factoring out inventory builds and QE isn't enough?

I think they end up tapering, but I doubt they do so now.  If they do, you can bet they are purposefully accelerating the collapse effects on society.

They have to run the market up as high as possible so they can fleece the absolute last Muppet to the greatest extent before they collapse the false narrative foundation of sand.

Wile-E-Coyote's picture

"The supreme art of war is to subdue the enemy without fighting.”

Gold is the key.

666's picture

Megalomaniac Ben doesn't want the crash to happen during his tenure, so there will be no taper in December. Mr. Yellen will have to make the decision next year, and he/she/it will probably chicken out and just print moar.

ThisIsBob's picture

True.  Her will do anything to not leave a failure.  Let it all blow up on Janet's watch.

oak's picture

2014 is election year, therefore, the best taper year would be in 2015, one year or so before obama leaving the office.

Itch's picture

To know your enemy, you must become your enemy...but we have seen the enemy, the enemy is us...hence, know thy self, and beat the enemy, thy self. 

These rivers run deep.

cossack55's picture

Bottom line:

Fuck the FED and the tapir they rode in on


Note: The Brazilian Tapir rather favors J. Yellenanke



Smegley Wanxalot's picture

Think like the Fed:  "Print gooood. No print baaad. . . . . Me print. "

virgilcaine's picture

No way anyone can estimate what a sociopath will do.

Colonel Klink's picture

There can be NO taper without collapsing the eCONomy.  Chuckie Shumer tells them to get to work at the slightest downturn in the eCONomy.  I can only imagine the screaming you'd hear from the politicans if things really started to tank, ala 2008.

The Feral Reserve will continue to make sure it's a slow grind down until the final collapse.  For a clue, just look at Japan.  That's all one needs to know.

The Fed thinks they're bigger than "the market", once again history will rhyme when the market trumps the hubris of men.

Once things pop, 401Ks, mutual funds, pensions, etc and nations will disolve when derivatives are triggered.

Here's just one person's idea of what it may look like, from the movie Rollover circa 1981.


It starts getting good about 3 minutes in.

centerline's picture

That's how I see it at this point.  It will unbelievable... but, absence something really odd happening, they will hold the lid on things through a slow, global grind.

Either it results in outright war - with complete destruction of all savings, pensions, etc. (current global banking system implodes) leading into some new world  -OR- it leads to cascading municipal failures, bail-ins, pension wipe outs, etc. and the US realizes a soviet-style melt down as part of the same global banking system implosion.

Either way, the system is toast... the banks as we know them are toast... the FED is even toast (and with most other central banks around the world).

fonzannoon's picture

Kito sent this to me. I don't know if ZH ever posted this but if they did not they should post it with a h/t to Kito. This guy makes Nigel look like a wuss.


centerline's picture

Thanks.  I will have to switch to my computer that has speakers now.  Judging purely from the comments it looks like a good clip.


OneTinSoldier66's picture

Sweet clip fonzannoon. What he says is exactly the same thing we have going on here. I'm sure it's the same in Japan, etc, etc...

Tim_'s picture

"...as the people get your number, it won't be long before they storm this chamber, and they hang you, and they'll be right!"

We need more lampposts.

PrecipiceWatching's picture

“It won’t be long before the people storm this chamber and hang you...and they’ll be right!"



Should be chiseled into the front panel of the speaker's Podium in both chambers of the criminal US Congress.

Not to mention tattooed on the illicit Kenyan's forehead.

GrinandBearit's picture

The Fed will NEVER taper.  In fact, they will increase the QE once the market starts to fall apart.

Getting Old Sucks's picture

Exactly.  They can't ever taper.  So why all the BS about it?  Cut the BS!  Oh wait, that would hurt buying the fucking dip the BS creates.

fonzannoon's picture

It's articles on here like this that make me concerned that everyone including myself is insane with a possible side of mental retardation. Why is the idea of a taper even discussed? Why do we even comment on it? The only reason the taper is thrown out as a possibility by the  fed is to prevent the S&P from skyrocketing to 5,000 in a disorderly fashion. This is all just to give them cover until they have bought up enough of the bond market to prevent a mutiny. 

Then at the June 2017 meeting Yellen will whip her (actual) balls out in the press conference and yell "HAHA BITCHEZ HOW YOU LIKE ME NOW!".

OneTinSoldier66's picture

Even if The Fed were to taper, they would still be printing enormous amounts of money up out of thin air. The printing of money up out of thin air will never stop. Any talk of taper has been, and will be, a distraction and sideshow.


All articles and discussion should be about "End The Fed".


sixsigma cygnusatratus's picture

If anything, the Fed will need to increase the print.  There is a built-in decay in the value of each month's print, i.e., this month's $85B does not have the same spending power as last month's or the month's before.


OT, I'm starting to believe that Bitcoin IS the Fed's exit plan.

OneTinSoldier66's picture

Don't know about Bitcoin. But +1 for the first part. The Fed is the definition of decay.

stant's picture

no taber until the market makes them. the stawk market is the bond markets little bitch

nmewn's picture

Isn't it odd that the amount created from thin air equals almost perfectly the amount government overspends by?

Its like the eighth circle of hell or sumpin ;-)

CPL's picture

The central banks having to double down, then quadrupal down, then octorupal down, etc, etc, etc.  Wait until it hits a trillion printed per month.  lol!

Interest on all debt world wide @ sub 1% has surpassed the entire GDP of the entire planet months ago.  Wait until the Jan 2014 'event horizon' of >1% interest achieving it's own velocity...then Feb 2014 when it goes into Exponential rolling debt mode.  Millionaires become paupers.  Then the Billionaires soon after.

Grab some popcorn...

Oh yeah the corrupt Icelandic government was overthrown yesterday by it's population.  No word on guilotines yet.  lol!

nmewn's picture

No doubt CPL...zero bound and chained to debt issuance.

Yeah I heard about Iceland.


Of course with MSM idiots blathering on about every shiny object presented to them, no one else heard about it..lol.

Now they'll have to do a whole week about Mandela.

Seasmoke's picture

If they were ever going to Taper, this month is their only chance.