Atlanta Fed: "Why No Taper? One Man's View"

From the Federal Reserve Bank of Atlanta's Macroblog:

Martin Feldstein will give you three possible reasons why—to some surprise, I gather—the Federal Open Market Committee (FOMC) decided two weeks back to not adjust the pace of its asset purchases:

One possibility is that Bernanke and the other FOMC leaders… never intended to start tapering…
A second possible explanation is that Bernanke and other Fed leaders were indeed anticipating that they would begin tapering QE in September but were startled at how rapidly long-term rates had risen in response to their earlier statements…
The third scenario is that economic activity was clearly slowing, with the future pace of activity therefore vulnerable to even higher interest rates.

Speaking only for myself, I choose Feldstein's third option. He goes a good way to making the case himself:

The annualized GDP growth rate in the first half of 2013 was just 1.8%, and final sales were up by only 1.2%. Although there are no official GDP estimates for the third quarter, private-sector assessments anticipate no acceleration in growth, putting the economy on a path that will keep this year's output gain at well under 2%.

That unfortunate story was pretty clear on the eve of the FOMC meeting—in particular, the lack of evidence that growth in the second half of the year would be an improvement on the already disappointing pace of the first half. Our own internal "nowcast" tracking model was suggesting third-quarter GDP growth in the neighborhood of the sub-2 percent growth that Feldstein cites. And as this table shows, things have not improved since:

These facts, of course, were reflected in the downgrade of the 2013 growth forecasts published in FOMC participants' Summary of Economic Projections. But that is not all, as Professor Feldstein reports:

In addition, the Fed's preferred measure of inflation was much lower than its 2% target. The annual price index for personal consumer expenditure, excluding food and energy, has been rising for several months at a rate of just 1.2%, increasing the possibility of a slide into deflation.

And even if you don't go in for inflation measures that exclude food and energy, it doesn't much matter, because all-in inflation was, and still is, also running well below that 2 percent target....MORE