In the aftermath of the financial crisis, the Fed launched its now well-known and closely followed quantitative easing (QE) program to stimulate the economy.
Five years after the crisis, the U.S. housing and manufacturing sectors appear to be in recovery mode, but as recent nonfarm payroll trends have made clear, the labor market continues to be stuck in second gear.
With investors anxious over the prospects of reduced quantitative easing, is it possible the central bank might begin to cut its asset purchases at the same time its view of U.S. economic growth is dimming?
The answer might seem to be “no.” After all, to do so would likely heighten market volatility as investors worry the central bank is pulling back too soon.
But I say the answer is actually, “yes,” and investors need to be prepared for this paradox: Fed QE tapering is likely to come alongside downward revisions to the central bank’s projections for real GDP growth (see graph).
