Yippee, we`re almost at my favourite time of the month again – not; yup you guessed it – as do the publishers(!) – US non-farm payrolls on Friday. The problem is that this week`s numbers are now taking on an even greater significance because the commentators are now looking at this number as a pre-cursor to action (or not) from the Fed on whether or not to announce a reduction in QE in December! This is a pretty poor situation to have arrived at, and although I try to be as supportive as possible of central bank actions, I do find it difficult to make a case for the indecision, and therefore assumed reactive nature of decision making that is now the perception of the Fed! To have the market think that one number, or one week`s numbers, or even one month`s numbers can, or even worse, should, dictate policy is a failure of communication . At least I hope that is the case, because if policy really is `on the hoof`, and dependent on a NFP number, then we had all better run for cover!
It has been encouraging to see recent US leading indicators broadly looking up, and the Fed has told the world that interest rate decisions will be largely dependent on unemployment eventually coming down as a result of this general improvement in economic conditions – no problem. The problem is QE, and how to communicate a strategy of withdrawal that the market will understand. The nightmare is perception, and perception can be extremely damaging to confidence. Say the NFP numbers on Friday are 250k, unemployment nudges down, and later in the month, the Fed announce the beginning of the end to the QE programme, and start to reduce bond purchases. It might be the right course of action, but the hole that the Fed have dug for themselves means that should January`s economic indicators including NFP disappoint, the market may get very confused about the wisdom of that move – AND, if fear and uncertainty about such a possibility in turn is seen to delay a decision by the Fed, we get stuck in `will they, won`t they` land – the place that has become home since September.
The main thrust from the Fed, is about divorcing in the markets mind, the difference between winding down QE, and raising interest rates; about keeping rate rises under control along the curve when a taper in announced. As I have said before, after September there is now no right or good time to start winding down QE, but instinctively I can`t believe it is right to just kick this down the road each month. I believe the Fed should announce a beginning of an end to the stimulus programme as soon as 17/18 December, BUT they could announce that the withdrawal of that stimulus will be gradual, say $8bn per month; with that number being the minimum, but a greater amount being possible should the cumulative impression be that the recovery is gaining traction.
No easy way out of this now, but, a clear policy on QE needs to come from the Fed, and soon. It will become damaging to Ms Yellen if the market believes that the Fed is a puppet of monthly meandering statistics. Equally, delay through fear of consequences – both to the asset markets, rates markets and to the Feds credibility – is unacceptable and damaging.
None of this may actually be the case, but perception that some of it could be the case is in itself, potentially dangerous. Action or no action in the wake of Fridays NFP, we need to know there is a plan, and that is singularly the most important thing!