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WSJ’s Hilsenrath: September FOMC Meeting “Cliffhanger”

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From Jon Hilsenrath at the WSJ: Fed Officials Face Cliffhanger September Meeting After Mixed Jobs Report

Fed officials want to start scaling back their billion-per-month bond-buying program this year and could take a small step in that direction at their policy meeting Sept. 17-18. But the economic data in recent months have been ambiguous and new threats to the economy and markets loom, which could prompt officials to wait longer before acting.

Many officials believe it matters little in theory whether they start pulling back the program in September or later this year. … But in reality, officials have concluded … it matters immensely what signal investors take from their actions.

Yields on the benchmark 10-year Treasury notes have jumped from 1.6% in May to nearly 3%

On the “downside risks”, Ethan Harris at Merrill Lynch wrote today:

Perhaps the strongest case for tapering is reduced downside risks. The economy has weathered a fairly big fiscal shock—by our estimates, more than 2% of GDP—with just two bad quarters—0.1% growth in 4Q and 1.1% growth in 1Q. Moreover, stripping out inventories and trade—the two wildcards of GDP accounting—final sales to domestic purchasers follow a similar pattern, bottoming in 1Q, when the tax and spending shock hit. Unfortunately, when Congress returns from its summer siesta on September 9, three major policy risks loom: Syria, the 2014 budget and the debt ceiling. We don’t expect a major shock to the economy, but the Fed will not be sure when it meets September 17-18.

A few months ago I thought the Fed would wait until December, but the upward revisions to GDP and the decline in the unemployment rate has made it less clear.  I don’t know how much the Fed will weigh the decline in the participation rate.

Calculated Risk

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