2013-10-22 18:44:00
Holding Firm as Taper-Talk Creeps Back to Fore

by Peter A. Grant

October 21, AM
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Gold remains narrowly confined. While last week's post-can-kick gains have been sustained, the yellow metal hasn't been able to extend higher thus far.

With the latest government shutdown and debt-ceiling crisis already fading into memory — and the next one now months away — talk of Fed tapering is once again creeping back to the fore. However, Fed tapering seems even less likely now than it did back in September.

The Fed has always said that tapering would be based on the economic data. I didn't see anything in the data leading up to the September FOMC meeting that was remotely sufficient to warrant a taper. The government shutdown took additional wind out of an already flagging economy.

Chicago Fed dove Charles Evans doesn't believe that an October taper is appropriate for that very reason. This is a sentiment shared by The Wall Street Journal's FedWatcher Jon Hilsenrath. Additionally, Evans believes a December taper would be difficult because the next U.S. fiscal crisis will be right around the corner at that point.

The fact that Janet Yellen will be taking over as the new Fed chairperson early next year is yet another reason not to taper any time soon. After all, Yellen is arguably more dovish than Ben Bernanke.

Additionally, a Bloomberg article this morning points out that foreign demand for U.S. debt has dropped in recent months to levels not seen since 2001. Demand for Treasuries was negatively impacted by the recent debt ceiling crisis. With another crisis queued up for early-February, foreign demand for bonds is likely to remain tepid.

If foreigners are not buying our debt, who do you suppose will step up to fill the demand void? The answer of course is the Fed. In fact, if foreign demand for Treasuries remains weak and so does the U.S. economy, a Yellen Fed may look to increase QE rather than taper.


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