The last chapter of the Bernanke era
WASHINGTON (MarketWatch) - It's fair to say this will be a pretty big week for Federal Reserve Chairman Ben Bernanke.
On Monday, he will appear alongside Alan Greenspan and Paul Volcker to celebrate 100 years of the existence of the institution that each of them has led.
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By Friday, depending on the Senate schedule to confirm President Obama's choice as his successor - Fed Vice Chairwoman Janet Yellen - Bernanke may be out of a job.
In between, Bernanke will have his final opportunity to provide his spin on his seven-year run leading the central bank - as well as the option of beginning of the end of the unconventional asset-purchase program that is popularly called QE3. The Federal Open Market Committee of the Fed will end its two-day meeting on Wednesday, and Bernanke will hold a news conference.
Employment data, which has averaged 193,000 new jobs per month over the last three months, gives good reason for the Fed to slow the rate of bond purchases, currently at $85 billion per month.
'Based on labor market data alone, the probability of a reduction in the pace of asset purchases has increased,' said St. Louis Fed President James Bullard last week.
But there's a key word in that sentence - 'alone.'
The inflation data provides no reason to taper. The inflation gauge the Fed prefers, something called the PCE price index, averaged an annual rate of just 1.2% in the third quarter. The Fed targets inflation by this measure of 2%.
It's not an outlier among price gauges: the producer-price index in November, on a year-over-year basis, rose a scant 0.7% in November. Consumer price data due Tuesday is likely to show similarly faint inflationary pressure.
A Wall Street Journal poll of economists found about a quarter who expect a taper on Wednesday.
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Josh Shapiro, chief U.S. economist at MFR Inc., puts himself narrowly in the December taper camp - saying growth is healthy enough to taper considering reduced Treasury coupon issuance and untested tools to manage the central bank's balance sheet.
But there are plenty of Fed watchers who say the central bank won't start the process.
'What's the rush,' asks Steve Ricchuito, chief economist for Mizuho Securities USA, who's one of the more pessimistic voices of Wall Street economists. 'You've tried to back away for how many years, and each time you've made a mistake. You have no inflation pressure, and you have very little risk from letting [QE3] run for one more quarter.'
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Price pressures are scant, and protests over pay from Boeing machinists to fast-food workers are understandable at a time when corporate profits are at record levels as a percentage of the economy, he says.
As for the notion the Federal Open Market Committee would taper just to mark the end of Bernanke's tenure, that is just 'market mumbo-jumbo.'
Ricchuito also pushed back against the popular notion of a central bank taking away the punch bowl just as the party gets started.
'That only works if only inflation is the issue,' he says. When there's also the issue of a big drop in credit, the Fed should wait 'until the party gets a buzz before you take away the punch bowl. There is no evidence that this economy has a buzz,' he says.
The fairly bright-looking retail sales report released last week, Ricchuito points out, was boosted by auto makers, who already are planning to scale back production in the first quarter.
Industrial-production data due Monday and home-sales figures coming on Thursday are indicators he's closely following.
'I want to see what the real numbers [as opposed to surveys like the ISM manufacturing report] are and am looking to see whether housing has bounced back,' he says.
Also read:Fed wants to exit QE but keep long-term rates low
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