Why Janet Yellen May Surprise and Not Taper Wednesday
The Fed could cite potential weakness in this sector for why more data is necessary before continuing along the same path.
Expectations are high that the Fed will continue along its tapering path at this week's FOMC meeting. To review, the Fed has made it a point to say it wants out of quantitative easing. I believe much of this relates to the idea that continued balance sheet expansion is ultimately more of a risk to financial markets than most think. I've been talking to my colleagues Ed Dempsey and Charles V. Bilello this week, debating whether the Federal Reserve may actually decide to taper its tapering of bond buying and surprise investors. I stand alone in believing that Janet Yellen may decide to pause this time around.
Why do I think the Fed will surprise and delay its tapering course by a few months? Quite simply -- housing. There has been surprising deceleration as of late on that front, with consumer stocks anticipating some weakness in spending power. If the stock market alone holds new highs but home values fall, then the wealth gap will only widen and counter Federal Reserve efforts to juice reflation. That is not to say that QE has helped to spark inflation. Several members of the Fed have just over the last few days expressed concerns over low inflation. But the point remains true that the hardest thing to do for the Fed is to do nothing, which means it will continue along with the wrong medicine because it's the only medicine it can administer.
This really should not seem so far-fetched. The Fed surprised in September last year by not tapering when everyone believed it would. Instead, it waited until December to start the process. What's to say it won't pull the same trick again?
Take a look below at the price ratio of the SPDR S&P Homebuilders ETF (NYSEARCA:XHB) relative to the S&P 500 ETF (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/XHB is outperforming (up more/down less) relative to the S&P 500. A falling ratio means the opposite.
The market is anticipating further weakness in housing, which is a major pillar for the Fed and the economy. Could we very well see the Fed hold back, citing potential weakness in housing for why some more data may be necessary before continue along its path? While many believe the odds are low to none, that may be precisely why the Fed surprises the market. The obvious is only obvious after the fact. If you were sitting in Yellen's shoes, you'd follow trends. So far, the trend in housing is far from being a friend to the Fed.
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