Upbeat Fed Outlook Suggests QE Tapering is Near

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Conditions continued to improve in the U.S. over the past quarter, suggesting that the economy is reaching the point where monetary easing can be pulled back, according to the most recent assessment from the Federal Reserve.

The central bank said growth was moving at a “modest to moderate pace” with improvements coming across all the Fed districts.

“Consumer spending rose in most districts, reflecting, in part, strong demand for automobiles and housing-related goods,” the Fed said in its Beige Book report.

Increased activity also was reported in travel and tourism, nonfinancial services and manufacturing, which the central bank said had grown “modestly.”

The report also noted a moderate but steady growth in housing sales, and an “unusually strong” climate for condominiums and co-ops in New York City.

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The Fed also found that, contrary to conventional thinking, rising interest rates were not holding back housing activity.

“Reports from several districts suggested that rising home prices and mortgage interest rates may have spurred a pickup in recent market activity, as many ‘fence sitters’ were prompted to commit to purchases,” the report said.

Investors have been watching the Fed’s view on the economy intensely as the central bank ponders and exit from its $85 billion a month large-scale asset purchase program known as quantitative easing.

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However, markets reacted little to this report, with stocks continuing to rally and bond yields on the rise as well.

The Fed is buying $45 billion a month of Treasurys and another $40 billion in mortgage-backed securities.

However, with its balance sheet just shy of $3.7 trillion, the Fed and Chairman Ben Bernanke have begun to contemplate an exit at least from the bond-buying aspect of its historically aggressive monetary easing.

Bernanke has said an unemployment rate in the range of 7.0 percent would be a good benchmark for ending QE, while 6.5 percent would be necessary before raising its policy rate, which remains near zero as it has since the financial crisis.

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The Fed also has sought to generate more inflation and would like to see a 2.5 percent rate also before raising rates.

For most occupations and industries, hiring held steady or increased modestly relative to the prior reporting period,” the Beige Book said. “Upward price pressures remained subdued, and prices increased slightly during the reporting period. Wage pressures continued to be modest overall.”
Financial markets have been in flux since Bernanke first floated the concept of QE tapering back in June, with August standing as the stock market’s worst month since late 2012.

(Click here for the full Beige Book report.)

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