The Beige Book's a blow for tapering

Data from the Federal Reserve's latest Beige Book makes it harder to justify tapering of US monetary stimulus.

The latest US political stand-off has unnecessarily encouraged volatile mortgage rates and is directly working against the economic recovery the Federal Reserve is trying to manage. 

The key takeaway from the latest Beige Book, released overnight, is modest lending activity, especially across residential loans which have recently provided a more telling reflection of the state of the US economy.

The data suggests things actually haven’t improved, making it increasingly difficult for the Federal Reserve to justify tapering. All up, it doesn’t look like the data is going to be convincing enough anytime soon for the Fed to turn down the liquidity tap.

Mortgage lending fell in some districts, with higher mortgage rates cited as the reason for reduced financing activity. Although the 10-year Treasury yield has partially retreated - to hover just above 2.6 per cent from a high of 2.99 per cent reached in September – it is evident mortgage owners simply cannot afford higher rates.

Before talk of tapering hit markets in May, the 10-year Treasury yield sat comfortably below 2 per cent. In September's FOMC minutes Federal Reserve members expressed concern over higher short-term rates and the impact that would have on the economy.

The data collected in the Beige Book ends on October 7, well before debt dramas really gripped the news flow altering financial decisions for US consumers and the all-important Treasury yields. As a result, it wouldn’t be astonishing to see a hangover of higher 10-year Treasury yields impacting lending activity in the next Beige Book, not due until early December.

The Beige Book confirmed what many market pundits had expected – the US government shutdown and debt drama would impact the underlying economy by fueling uncertainty. Consequently, four of the twelve Fed districts reported slower economic growth over the period.

There are three looming vacancies on the seven-member Federal Reserve Board of Governors and the possibility of more vacancies as 2014 develops, making it increasingly difficult to anticipate the future course of monetary policy.

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