Tuesday, December 31, 2013

Question #5 for 2014: Monetary Policy: Will the Fed end QE3 in 2014?

by Bill McBride on 12/31/2013 12:58:00 PM

Earlier I posted some questions for next year: Ten Economic Questions for 2014. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2013.

5) Monetary Policy: It appears the Fed's current plan is to reduce their monthly asset purchases by about $10 billion at each FOMC meeting in 2014. That would put the monthly purchases at close to zero in December 2014. Will the Fed complete QE3 in 2014? Or will the Fed continue to buy assets in 2015?

Although the Fed is not on auto-pilot - the FOMC is still data dependent - I think it is very likely that QE3 will be completed by the end of 2014. There are 8 meetings during the year, and I expect the FOMC to reduce the pace of asset purchases at about $10 billion per meeting. In January, the Fed will purchase $75 billion in assets and I expect that to be reduced to $65 billion in February (following the meeting on January 28th and 29th). And a similar reduction at each meeting all year.

It appears they will only slow the taper if inflation declines sharply - or if the economy stalls (I think both are unlikely).

It also seems unlikely they will accelerate the pace of the taper significantly.

So even though the Fed is data-dependent, I currently expect the Fed to reduce their asset purchases by $10 billion per month (or so) at each meeting this year and conclude QE3 at the end of the 2014.

Here are the ten questions for 2014 and a few predictions:
Question #1 for 2014: How much will the economy grow in 2014?
Question #2 for 2014: How many payroll jobs will be added in 2014?
Question #3 for 2014: What will the unemployment rate be in December 2014?
Question #4 for 2014: Will too much inflation be a concern in 2014?
Question #5 for 2014: Monetary Policy: Will the Fed end QE3 in 2014?
Question #6 for 2014: How much will Residential Investment increase?
Question #7 for 2014: What will happen with house prices in 2014?
Question #8 for 2014: Housing Credit: Will we see easier mortgage lending in 2014?
Question #9 for 2014: How much will housing inventory increase in 2014?
Question #10 for 2014: Downside Risks