Over the past few days we have seen a relatively minor selloff in domestic risk assets. A 4% swing peak to trough in equities is not exactly earth shattering, but the onset complacency and lack of volatility in the past year amplified at least the vocal reaction to the move. This coupled with a few mixed economic signals has some under the impression that the Fed might alter its tapering path for QE.
With inflation currently picking up, unemployment significantly below Fed projections, and GDP growth significantly above them, I think the easier case is for more tapering not less. These projections are already so cautiously off the mark that the January unemployment rate is likely to breach the 2014 year end central tendency. That’s an estimate made last month.
Projections which will need to be need to be drastically altered in hawkish directions below.
This situation reminded me of a quote by Dallas Fed President Richard Fisher from his remarks on January 14th. Though clearly the most hawkish member of the Fed, he is a voting member this year, and I found this insight important especially as to why their focus on long term real economic trends is of a great deal more importance than noisy short term market reactions.
“Were a stock market correction to ensue while I have the vote, I would not flinch from supporting continued reductions in the size of our asset purchases, as long as the real economy is growing, cyclical unemployment is declining and demand-driven deflation remains a small tail risk, I would vote for continued reductions in our asset purchases, with an eye toward eliminating them entirely at the earliest practicable date.”
I am confident that as long as the dual mandates of inflation and unemployment are moving in the right direction this, extremely competent, Fed will continue along the path of policy normalization.
Full disclosure I’m a short duration all over town.