Cam Hui | Sep 24, 2013 02:55AM ET
William Dudley of the New York Fed made an important speech yesterday entitled Don Kohn , have pointed out concerns over the impending fight over the debt-ceiling:
With respect to the second metric—confidence that the economic recovery is strong enough to generate sustained labor market improvement—I don’t think we have yet passed that test. The economy has not picked up forward momentum and a 2 percent growth rate—even if sustained—might not be sufficient to generate further improvement in labor market conditions. Moreover, fiscal uncertainties loom very large right now as Congress considers the issues of funding the government and raising the debt limit ceiling. Assuming no change in my assessment of the efficacy and costs associated with the purchase program, I’d like to see economic news that makes me more confident that we will see continued improvement in the labor market. Then I would feel comfortable that the time had come to cut the pace of asset purchases.
What's new here?
I think that this was an important speech from a key Fed governor explaining the decision to delay the taper. William Dudley is not far from the mainstream thinking at the FOMC, but I still believe that much of the reasoning behind the decision was not a surprise. Here are his key reasons:
Unless the FOMC is truly freaked out about the possible effects of the debt-ceiling debate, I don't see anything very new here. The other factors are already well known, but between May 22 and September 19, we had Bernanke and a parade of Fed governors telling us that, while everything is "data dependent", they were on track to taper by the end of the year if the economy continues on the current trajectory.
So what changed? Did they freak out over a debt-ceiling impasse? They knew that interest rates were backing up, so that was not surprise.
IMHO, the FOMC's September surprise decision was a failure of the Fed's communication policy.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd . (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”
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