St. Louis Federal Reserve President James Bullard dissented from this week’s FOMC decision. Tim Duy, one of my most valued reads says
Bullard’s dissent is an ‘eye-opener’, that the Fed is ‘no longer comfortable with asset purchases and want to draw the program to a close as soon as possible. And that means downplaying soft data and hanging policy on whatever good data comes in the door.’
Duy concludes (bolding mine):
The Fed changed the game this week. Bernanke made clear the Fed wants out of quantitative easing. While everything is data dependent, the weight has shifted. The objective of ending quantitative now carries as much if not more weight than the data. Market participants need to adjust the prices of risk assets accordingly.
Bottom Line: I think the question is not how good the data needs to be to convince the Fed to taper. The question is how bad it needs to be to convince them not to taper. And I think it needs to be pretty bad.
Duy’s view is a contradiction to much of the prevailing market opinion – read that bolded part again. If Duy is correct, and his view takes hold in the market, the market repricings we have seen so far are only just the beginning. Who said it was going to be a quiet summer?
