ANALYSIS: Why The Federal Reserve Won't 'Taper' Its Quantitative Easing Next Month

  @MikeObelm.obel@ibtimes.com on August 27 2013 1:01 PM
US Fed
The Federal Reserve Building stands in Washington April 3, 2012. REUTERS/Joshua Roberts

Don’t hold your breath waiting for the Federal Reserve to start dialing down its support for the U.S. economy, something numerous commentators and Wall Street investors are expecting will start next month.

Central bank leaders began sending signals in the spring that the Fed's $85 billion-per-month bond-buying spree, ongoing since last September, may be reduced because – according to hints from some Fed officials -- the economic recovery is well underway.

The problem is, the economic recovery is not well underway.

Take unemployment. It is not just that no one believes that the Fed’s original trigger for tapering its quantitative easing, as the bank’s unprecedented bond buying is called, will be met this year. Originally, the Fed said it would continue quantitative easing until the unemployment rate reached 6.5 percent. As of July it was 7.4 percent.

Rather, the falling odds of a taper starting next month stem from retailers’ second-quarter earnings reports. Wal-Mart Stores Inc. (NYSE:WMT) said in its second-quarter earnings report that February sales were awful. Abercrombie & Fitch Co. (NYSE:ANF), Aeropostale Inc. (NYSE:ARO) and American Eagle Outfitters (NYSE:AEO) turned in similarly dim results, which cumulatively have helped pull the rug out from under expectations that were fairly upbeat until recently.

Analysts are currently expecting S&P 500 calender year 2013 earnings growth to come in at 6.03 percent, down from the April 1 estimate of 7.41 percent, according to an S&P Capital IQ note by Christine Short.  

The fact is, the American consumer is not spending because wages are stagnant and have been since the beginning of the second quarter.

The diminishing odds of a taper also reflect economic reports. July orders for durable goods, items like refrigerators and cars that are expected to last at least three years, dropped 7.4 percent, far more than the 4 percent analysts were expecting. It was the biggest drop in nearly a year and helped confirm doubts that the U.S. gross domestic product (GDP) can grow even 2 percent this year.

Further, sales of newly built homes tumbled 13.4 percent in July, the steepest such drop in three years. Analysts blamed rising interest rates, which disproportionately hit first-time buyers. The rate for a conventional fixed-rate, 30-year mortgage has climbed from 3.59 percent two months ago to 4.58 percent.

Even data released Tuesday by Case-Shiller showing average house prices rising in June is signaling that prices may be near a top.

“Adjusting for normal seasonal patterns, all three of the main Case-Shiller indices suggest that the rate of house price gains may be starting to peak,” said Ed Stansfield, chief property economist with Capital Economics. “In other words, the latest data suggest that house price inflation may be approaching a plateau.”

Growing doubts about the U.S. economy's ability to maintain its ascent -- modest as it has been -- are growing.

"We continue to believe the Fed will not pull away the punch bowl too soon, and that the broader market will continue to gain altitude," wrote Leah Williams, research analyst with PiperJaffray.

 

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