HEARD ON THE STREET
July 16, 2013, 4:37 p.m. ET
The Fed's Credibility Gap
Shifting Economic Circumstances Are Undermining the Talk of Tapering Bond Purchases
By JUSTIN LAHART
Having suggested it will start scaling back its bond purchases in September, the Federal Reserve is beginning to look like a taper tiger.
When the Fed's policy-setting committee met in June, it had a decidedly upbeat outlook on the economy. Household and business spending were on the upswing, it said, and inflation, while low, was getting pushed down by "transitory influences." The projections the Fed released pointed to a stronger economy through the remainder of the year than the bulk of Wall Street economists predicted.
That was the context for the committee's decision to authorize Fed Chairman Ben Bernanke to say that the Fed could begin winding down its bond-buying program "later this year."
Since then, the context has changed.
The Federal Reserve, led by Chairman Ben Bernanke, is starting to look like a taper tiger.
A week after the Fed met, the Commerce Department said that gross domestic product had grown by an annualized 1.8% in the first quarter, less than its earlier estimate of 2.4%, largely because consumer spending wasn't nearly as strong as it had thought.
It has lately become clear that growth in the second quarter was also pretty weak, something that might be reflected in Mr. Bernanke's testimony Wednesday before Congress. A series of soft economic reports, including May wholesale inventory figures and, on Monday, June retail sales, led Macroeconomic Advisers to revise down its estimate for second-quarter GDP growth to 0.7% from 1.7% at the start of the month.
Small wonder investors have lately been marking down their expectations for how quickly the Fed will taper, pushing the yield on the 10-year Treasury note lower.
Economists hope things will improve in the second half, as the effects of higher taxes and reduced government spending wear off. But what scant data there are suggest it hasn't happened yet.
Indeed, unemployment claims have lately risen. And Gallup's daily reading on consumer confidence has retreated since late May even as the stock market has rebounded.
Indeed, unemployment claims have lately risen. And Gallup's daily reading on consumer confidence has retreated since late May even as the stock market has rebounded.
Unless things pick up soon, the Fed will have an increasingly hard time cutting back bond purchases without fostering the impression it is basing policy on Little Orphan Annie expectations for the economy, where better times are always a day away.
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