“With talk of “tail risks” – like a hard landing in China, the U.S. going over the “fiscal cliff,” or a country exiting the euro – fading from the collective discussion, arguably the biggest open question for markets right now is when the Federal Reserve will begin to tighten monetary policy.
Deutsche Bank economist Joe LaVorgna thinks the central bank could be ready to start slowing its quantitative easing program as early as June.
In a note to clients today, LaVorgna writes:
The Fed unexpectedly began discussing when to diminish and terminate QE at last December’s FOMC meeting. These deliberations no doubt continued at the January meeting for which we get the minutes today. We do not expect the minutes to suggest the Fed is quite ready to slow the pace of its $85 billion per month of open-ended Treasury and mortgage purchases. After all, policymakers did not have the February employment report when they met in late January, which showed decent job growth—nonfarm payrolls were up +157k—and sizeable upward revisions—the level of December 2012 employment is now about 650k higher than what was first reported.
Simply put, not enough changed in the economic outlook between December and January to constitute a material change in the Fed’s economic and financial assessment. However, based on our GDP, unemployment and inflation forecasts, we believe policymakers will eventually announce their intention to slow the pace of QE by June and to halt QE altogether by the end of December….”
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