Donald Markwardt
Senior Research Analyst, International Finance and Macroeconomics Research
Capital Flows and Systemic Risk
Donald Markwardt is a senior research analyst in international finance and macroeconomics at the Milken Institute. He studies topics relating to systemic risk, capital flows and investment. Concentrating on systemic risk assessment in the financial system, his recent work focuses on liquidity and financial stability in the asset management industry.
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Close to a quantitative exit at the FOMC?
By: Donald Markwardt
September 12, 2013

The Federal Open Market Committee of the Federal Reserve will meet next week to discuss the nationaEUR(TM)s economic outlook and decide policy. Great anticipation surrounds the question of whether the Fed will begin tapering its relentlessly debated quantitative easing program at this gathering. The shock waves triggered by the mere mention of a pullback in its monetary stimulus are well-known: 10-year Treasury yields nearly doubled, U.S. mortgage rates hit multiyear highs and many emerging markets fell into a tailspin of capital outflows and currency depreciations.

Some form of tapering does appear extremely likely, if not certain, based on recent comments from Chairman Ben Bernanke and other FOMC members. However, in light of disappointing August job numbers and the possibility of derailing the economic recovery before itaEUR(TM)s gained steam, reductions will probably start off slow and on a small scale. The Fed might choose to pare back its Treasury purchases and maintain its pace of buying mortgage-backed securities, given the housing market slowdown and evidence that MBS provide a better stimulus channel.

Amid all the taper talk, less attention has been paid to the unveiling next week of the FOMCaEUR(TM)s 2016 forward interest rate guidance, but it may be just as important. Officials will offer their economic forecasts and views of the appropriate fed funds rate given those conditions. Their 2016 GDP, unemployment and inflation projections are likely to be consistent with the FedaEUR(TM)s long-run boilerplate assumptions.

However, FOMC members could be reluctant to offer guidance on short-term rates in line with their consensus long-run view of 4%. If they did, it would imply much tighter monetary policy than anticipated and could rock the global economy. Instead, Bernanke and Co. will probably convey their intention to keep the proverbial aEURoepunch bowlaEUR? of accommodative rates in place.