Will stock decline halt Fed taper? Not likely

The stock decline will not derail the Federal Reserve’s plan to further trim the bond-buying stimulus package, two Federal Reserve district bank presidents – Richmond’s Fed President Jeffrey Lacker and Chicago’s Charles Evans – said today.

Lacker said the “hurdle ought to remain pretty high for pausing in tapering,” while Evans added that it would require a “high hurdle” for policy makers to deviate from the $10 billion monthly cuts in bond-buying.

Neither Evans nor Lacker voted on policy in January.

The tapering should not have been a big surprise, Evans, commented, it had been “expected for quite some time. Each country has a set of issues they need to deal with.

The moderate pace of tapering that we laid out in conjunction with our stronger forward guidance provides an adequate amount of accommodation for the other foreign markets.”

Fed taper and jobs outlook

Financial market movements have not affected the outlook for jobs, a crucial benchmark for future policy at the Federal Reserve.

Lacker has never been keen on the Fed’s bond-buying program, he believes its effect on unemployment are mainly transitory.

In a speech today, Lacker predicted US GDP growth in 2014 of slightly over 2%, compared to Fed officials who expected between 2.8% and 3.2%.

Lacker said:

“This pickup in growth that we saw late last year is certainly welcome. I applaud it, and it may be a harbinger of stronger growth ahead. But my experience, our experience, with similar spurts of growth in the recent past suggests it might be too soon to make that call.”

“My suspicion is that growth will subside to about 2%, the pace we’ve been seeing since the Great Recession.”

In December 2013, the US unemployment rate dropped to 6.7%, according to an estimate by the Labor Department.

Last week, the Federal Open Market Committee (FOMC) voted unanimously to reduce bond-buying by another $10 billion per month, following the $10 billion decline in December.

The Fed said that an improved job market and signs of greater spending by consumers and businesses showed it was right to continue the taper.

Bloomberg News carried out a survey that included 56 economists. Fifty-two of them believe that US GDP (gross domestic product) is growing strongly enough to withstand the short-term decline in stocks and a slowdown of growth in the emerging markets. They also forecast that in 2014, Standard & Poor’s 500 index will go down 5.8%.

Massive pull-out from emerging markets

Investors worldwide pulled over $6.3 billion from emerging market stocks during the week ending January 29th, the biggest capital exodus since August 2011, according to Barclays Plc.

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