Nikhil Kumar: Don't get carried away by Fed's QE smoke signals

Click to follow
The Independent Online

Talking of the Fed, the minutes of the Federal Open Market Committee's December meeting sparked worries that the central bank might tilt towards withdrawing, or even stopping, its bond-buying measures before 2013 is out. The cause was the evidence of disquiet among some FOMC members about the stimulus measures, which have led to a ballooning of the Fed's balance sheet.

The response on the markets – equities ticked lower as the minutes were digested by investors – was attributed to surprise that the Fed would move to tighten policy at this juncture. But was it? Everyone knows policy will eventually be rolled back. Isn't it more likely that investors were just indulging in a bit of profit-taking after the faux-relief rally in the wake of the fiscal cliff half-deal?

Besides, the non-farm payrolls report released yesterday, which showed that growth in the US jobs market remains lacklustre, suggests no rollback or policy tightening is likely any time soon. While maintaining room for manoeuvre, the Fed has already linked any movement on interest rates to the unemployment figure (which held steady at 7.8 per cent in December, according to yesterday's report, well above the 6.5 per cent figure targeted by the central bank).

The gulf between the two numbers remains too wide. Another point, already made by the Fed-watchers at Seeking Alpha, is that the people making decisions at the December FOMC won't be the same ones setting policy this year. Membership changes at the first regularly scheduled meeting of the year, and the incoming group won't necessarily share the tendencies of the one that settled policy throughout 2012.