Investors are worried about the Federal Reserve's tapering of quantitative easing, perhaps as early as next month. We have our doubts that it will occur this year. Second-quarter GDP growth was only 1.3% year over year; unemployment is still above 7%; hiring and quit rates remain well below pre-recession levels; and core-inflation is running substantially below Fed targets. Third-quarter GDP, while expected to pick up, will not be reported until late October, so the "substantial improvement" in the economy and labor markets that the Fed is looking for before starting to taper seems premature to us. Some Fed officials do appear anxious to end quantitative easing because they either see it as ineffective and/or potentially fueling another asset bubble. We do not dismiss these concerns, but since tapering was first broached in May, 10-year Treasury yields have risen from 1.6% to 2.8%. As we have written previously, rising interest rates have taken considerable steam out of corporate mortgage refinancing activity, which have been directly helping business and household balance sheets. In other words, it looks as if jawboning has already had the intended effect that tapering was meant to have.

David Fuller's view This is a good point and I have also been mentioning the involuntary monetary tightening effect of higher Treasury yields in recent Audios. Mr Bernanke may be under some pressure to commence tapering QE in September but I suspect he would prefer to hold off, given a modest recovery in the US economy, slow global GDP growth and persistent disinflationary pressures.