Wall Street had been mildly negative for most of the afternoon in New York, but slipped further into the red towards the close.
Investors have been weighing up details of the most recent FOMC meeting, at which the committee voted for a second successive reduction in the size of the Fed’s monthly asset purchases. Although the minutes reveal some participants questioned how appropriate it was to make a reduction given some signs of weakness in the jobs market and how low inflation has remained, no-one went as far as opposing a taper.
‘A couple of participants observed that continued low readings on inflation and considerable slack in the labor market raised questions about the desirability of reducing the pace of purchases,’ the minutes state. ‘These participants judged, however, that a pause in the reduction of purchases was not justified at this stage, especially in light of the strength of the economy in the second half of 2013.’
The question now, of course, is how do they feel given the mostly weak data we’ve seen since the last FOMC meeting?
The minutes show that there was not just a clear consensus for tapering at the meeting, but a contingent felt more reductions should be the default unless something changes substantially with the US economy. ‘Several participants argued that, in the absence of an appreciable change in the economic outlook, there should be a clear presumption in favour of continuing to reduce the pace of purchases by a total of $10 billion at each FOMC meeting,’ the minutes said.
This creates a slightly sticky situation in that, judged purely on the incoming data, the US economy appears to be struggling through a soft patch since the end of last year. We have had more than one report in the last couple of weeks showing slowdowns in manufacturing and housing and, by the Fed's own admission, inflation is 'well below' target and there is 'considerable' slack in the labour market.
Some of these problems could be a temporary, weather-related anomaly, but we’re not going to start seeing data that is unaffected by the winter storms until the middle of next month at the earliest. Fortunately, there is no February FOMC meeting, but there is one scheduled for 18 to 19 March, and it is questionable about how much clearer the picture will be even by then.
We have jobless claims tomorrow and more manufacturing reports by way of the flash PMI and the Philly Fed survey.