Both on the sidelines and in public at this year’s economic symposium in Jackson Hole, Wyo., Fed officials suggested that a September taper is more likely than not.
While nearly everyone insisted that a decision to reduce the asset purchases under quantitative easing depends on incoming economic data—especially the August employment report—they also implied that the burden is on the economy to prove why the Fed should not taper.
In other words, fair-to-middling economic data that point to 2 percent growth and 150,000 to 200,000 of monthly job gains—such as the U.S. has achieved over the past several years—probably would be enough to support a September taper decision.
In a CNBC interview from Jackson Hole, Atlanta Fed President Dennis Lockhart expressed the view of several Fed officials when he said, “I’m actually looking at the data and asking if they deny or in some way undermine the basic outlook that I have in place. And, on that basis, then I could get comfortable with a move in September of some kind.”
In fact, several officials talked about the controversial June guidance from Fed Chairman Ben Bernanke as “the plan,” which apparently was the product of a compromise between hawks and doves on the committee. Bernanke’s guidance pointed to a near-term tapering en route to winding down purchases by mid-2014 if supported by better economic data. Officials suggested that it’s a matter of credibility for the Fed to follow through on what it had told markets.
“I’m going to stick with what Chairman Bernanke said: The decision when and if to taper later this year will depend on the data,” San Francisco Fed President John Williams said in a CNBC interview. “I do think that if the data continue to progress as we’ve seen, then I do agree that we should edge down or taper our purchases later this year.”
It would be wrong to see Fed policy as on automatic pilot. Several officials said the data were somewhat weaker than they had expected.
“We got kind of mixed data on the economy,” said St. Louis Fed President Jim Bullard. “So I’d be cautious. I wouldn’t want to prejudge the meeting. We want to take our time and assess what’s going on before we make a move here.”
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Some of the risks cited are concerns about another drawn-out debate on the debt ceiling in the fall, the possibility that the effects of the sequester could be worse than forecast and potential global economic weakness’ affecting the United States. Another worry is the impact rising interest rates might have on lending, borrowing and growth.
But in general, officials said, the economy is doing better since QE began. They point to job growth, which in the three quarters since the Fed launched QE3 is an average of about 161,000 higher than the two quarters before the program was initiated. Unemployment is 0.4 lower.
Most importantly, Fed officials have not moved from their belief in a second-half rebound, which is critical to the case for tapering. They point out that second-quarter growth is expected to be revised higher to 2.2 percent from 1.7 percent in a government report to be issued Thursday. This is seen as an especially positive number amid sharp federal spending cutbacks.
The average of Fed member forecasts for the year is running about a full percentage point above the actual numbers, and the economy would have to grow strongly to achieve the average 2.45 percent forecast. But Fed officials still seem confident that the momentum is going in the right direction and that the second half will be better than the first.
-Follow Steve Liesman on Twitter @steveliesman