The US economy is humming along nicely – so nicely, in fact, that the Fed might well decide to hasten its exit out of quantitative easing (QE) this year, according to Robert Wescott, economics adviser to former US president Bill Clinton and head of economic research consultancy Keybridge Research.
IPE sister publication IPNederland spoke with Wescott as he visited Amsterdam at the end of January on the invitation of Pioneer Investments.
“In 2013,” he said, “US GDP growth came out at around 1.9%, and this would have been 3.8% if it hadn’t been for fiscal consolidation.
“Fiscal tightening last year amounted to some 2% – the US government implemented more cuts in a single year than the administration [of UK prime minister David Cameron] did in its entire lifetime.”
Robust growth of more than 3.5% cannot be reconciled with QE measures designed to speed up the economy.
“Financial markets have been led to believe the Fed will opt for gradual tapering and keep interest rates near zero for an extended period of time,” he said.
“They believe any real discussion about the Fed’s exit is set for 2015, not 2014.”
But Wescott warned that they might be in for a surprise.
“Although a 1.9% growth is not enough to knock the Fed off its gradual tapering path, chances are we’ll see significantly higher figures this year, as fiscal consolidation is no longer an issue, at least for the next two years,” he said.
“I can easily picture an acceleration of the economy, where, suddenly, the Fed says ‘we are not going to taper by $10bn every six weeks – we’ll just cut QE in half by 50% today’.”
A sudden withdrawal rather than gradual tapering is likely to throw the markets into turmoil and will no doubt hit emerging markets.
But emerging market troubles have no significant impact on the US economy and will not be taken into consideration, according to Wescott.
“This may not be what people want to hear – and I personally think we should think more carefully about the exit ramifications – but the reality is the Fed bases its decision only on what is good for the US.”
Increasing the likelihood of a 2014 exit – Fed chairman Ben Bernanke’s successor may be a dove, but the contingent of hawks within the Fed is gaining strength, said Wescott, who counts himself among the hawks.
Stimulating the economy is fine as long as the economy needs the boost, he said, but no longer.
“As the US economy is gathering steam,” he added, “those measures bear close monitoring.”