Hilsenrath Explains Why Fed Hates 'Tapering'

The WSJ’s Jon Hilsenrath is a prolific writer about the Fed. Either that or his Fed sources keep calling him to get their message out to the financial markets. After posting the article discussed just below at 3:15 p.m. today, he posted an article titled, “Why the Fed Hates the Word ‘Tapering’,” at 6:08 p.m. today. Here is the message that I bet Fed officials asked him to pass on:

Stock and bond market investors and many television commentators regularly use tapering as shorthand for the Fed gradually reducing its monthly bond purchases.

The hangup for Fed officials is the word “tapering” suggests a slow, steady and predictable reduction from the current level of $85 billion a month at a succession of Fed meetings, say to $65 billion per month, then to $45 billion and so on. And that’s not necessarily what Fed officials envision.

Because Fed officials are uncertain about the economic outlook and the pros and cons of their own program, they might reduce their bond purchases once and then do nothing for a while. Or they might cut their bond buying once and then later increase it if the economy falters. Or they might indeed reduce their purchases in a series of steps if warranted by economic developments—but they don’t want the markets to think that’s a set plan. It is, as Fed officials like to say, “data dependent.”

That’s why the Fed’s most senior officials avoid the word. Fed Chairman Ben Bernanke never uttered the word “taper” in his March press conference; nor did he use it in more than two hours of congressional testimony last month. Instead, he said then, “in the next few meetings, we could take a step down in our pace of purchases.”

New York Fed president William Dudley also has been avoiding the word. Instead, he’s talked about wanting to “reduce the pace at which we are adding accommodation through asset purchases.”

Nevertheless, analysts can’t stop talking about tapering.

Hilsenrath reports that the word showed up twice in the March FOMC minutes and once in the April minutes by Esther George (FRB-KC), who was the lone dissenter and advocated ending QE.

I hope Hilsenrath does a story on “dialing back.” In his speech on April 16, Bill Dudley (FRB-NY) said:

At some point, I expect that I will see sufficient evidence of improved economic momentum to lead me to favor gradually dialing back the pace of asset purchases.  Of course, any subsequent bad news could lead me to favor dialing them back up again. As Chairman Bernanke said in his press conference following the March FOMC meeting "when we see that the…situation has changed in a meaningful way, then we may well adjust the pace of purchases in order to keep the level of accommodation consistent with the outlook."

Whatever happened to “fine tuning?” I think the concept that policymakers could do that was discredited a long time ago. Let’s see what happens to “tapering” and “dialing back.” Stay tuned.