Fed Taper Brings Us Back to the FutureLearn more about this firm
Sometimes the changes we fear most are the ones that reap the biggest rewards.
The FOMC’s announcement last week that the Fed would begin tapering its quantitative easing program in 2014 could be the signal that better economic times are upon us. It just took us a long time to get there. And we had to work through some of the anxiety over less easy money.
Beginning in January, the Fed will reduce its bond purchases by $10 billion, equally split between government securities and mortgage-backed securities. The Fed also pledged to keep short-term interest rates at current levels until "well past the time that the unemployment rate declines below 6.5%."
Stocks rallied on the news that investors seemed to fear for so long. Indeed, the Dow hit a record high in inflation-adjusted terms last week while small caps were a big beneficiary, rising nearly 4% for the week. Treasuries handled the news well, especially when compared to the visceral reaction they had to taper talk earlier this year.
“After the Great Recession derailed the economy for more than five years, we finally seem to be getting back on track.”
A Shot in the Arm
Stocks’ advance on the heels of the taper announcement suggests investors viewed the Fed’s decision as a vote of confidence for the US economy. After the Great Recession derailed the economy for more than five years, we finally seem to be getting back on track. That is, the future that was almost lost from sight as we tried to recover from such a heavy economic blow, can now begin to be reclaimed.
But it’s not just the Fed decision to taper that’s pointing toward progress. The US economic picture has improved considerably in recent months, as evidenced by stronger data. The final reading on third-quarter GDP growth was revised upward substantially, showing that the economy in the quarter grew 4.1% on an annualized basis. It marked only the second time since the recovery began in the summer of 2009 that we saw an annualized reading of 4% or more. Not only was this gain less inventory-driven than the prior release, but also the gain was driven largely by a significant boost in consumer spending.
This improvement in consumer spending can also be seen in the increase in consumer debt in the third quarter. We’re finally seeing a consumer that is re-levering after a number of years of deleveraging. Specifically, there’s been a slight increase in revolving debt, which could be a sign that Americans who were previously cautious about spending are now loosening their purse strings. This makes sense because the US labor market is recovering, albeit with some serious flaws.
Today’s personal income report for November also points to better household balance sheets. While personal income rose only 0.2%, wages and salaries actually rose 0.4%. Consumer spending rose 0.5% and the personal saving rate fell to 4.2%.
A Wealthier Mindset
Meanwhile, perhaps an even bigger driver of consumer confidence has been the wealth effect from rising stock prices and home values. Intuitively, the perception among consumers that they’re wealthier makes them more likely to borrow to pay for big-ticket items such as cars, houses and education. In addition, as noted in past issues of The Upshot, consumers are also regaining confidence after taking a hit from the government shutdown.
Further supporting the view that the US economy is returning to normal, the International Monetary Fund upgraded its outlook for the US economy. IMF Managing Director Christine Lagarde cited the recent budget deal in Washington and the Fed’s decision to taper quantitative easing as key factors that have reduced uncertainty.
Looking ahead, we expect US economic growth to accelerate in 2014 and that extreme risks will diminish. While threats remain, we’re optimistic that the economy is on a gradual path towards normalcy.
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