4 Reasons the Fed Won't "Taper" Under Bernanke

Stocks managed to produce their first winning day this week -- just barely -- as the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) rose 0.06% and 0.18%. As I argued this morning, were it not for the government shutdown and looming debt ceiling, those gains would probably have been meatier in light of today's nomination by the White House of Janet Yellen to succeed Ben Bernanke at the head of the Federal Reserve.

The CBOE Volatility Index (VOLATILITYINDICES: ^VIX  ) , for its part, came down off a three-and-a-half-month high, losing 3.6%, to close at 19.60. The VIX, Wall Street's "fear index," is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days.

No "taper" in 2013
And speaking of the Fed, Yellen's appointment overshadowed the release of the minutes of the Federal Open Market Committee's September meeting. The outcome of that meeting, with the Fed deciding not to scale back its monthly bond purchases ("quantitative easing", or "QE"), stunned the market. Having reviewed the minutes, I now think it unlikely that the Fed will make any changes to QE this year, for three reasons:

1. The recovery has slowed.
Take the following observations of the September meeting minutes:

Private nonfarm employment continued to expand in July and August, but at a somewhat slower pace than in the first half of the year.


Improvements in housing-sector activity appeared to slow, possibly reflecting the rise in mortgage rates since the spring.

2. Risks are greater.
"The staff continued to see numerous risks around the forecast" for the economy, we were told in the previous meeting's minutes. That has since been updated with a less happy outlook (emphasis mine):

The staff viewed the uncertainty around the forecast for economic activity as similar to its normal level over the past 20 years. However, the risks were viewed as skewed to the downside, reflecting concerns about the economic effects of the recent tightening in U.S. financial market conditions, the resolution of federal fiscal policy issues in the coming months, ..."

3. No more market consensus.
The Fed understands that it shocked the market by failing to deliver the "taper" of its bond-buying program, but, having taken that risk, it has now bought itself greater latitude with regard to selecting a date. Indeed, the market is now a lot more wary of settling on a consensus.

4. Yellen's the boss (almost).
Bernanke will leave the Fed in January. In principle, one wouldn't expect the transition calendar to affect policy, but waiting to pull back on quantitative easing until Yellen is in charge would serve the purpose of signaling to the market the change in leadership.

Add those up, and the odds of tapering in 2013 look vanishingly small to me -- keep in mind that there are but two meetings left, at the end of October and in mid-December.

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