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There has been a lot of talk about when the Fed is going to start tapering. The consensus view is that the FOMC will announce a decision to taper its asset purchases at the September 17-18 FOMC meeting. We believe the consensus is too optimistic about when tapering will begin.

The chart above shows the latest trends in the Economic Activity Indicator (BEAI). The BEAI indicator is based and weighted using similar methods as the Chicago Fed's National Economic Activity Index but is comprised of 16 key monthly and weekly economic data points. A consensus indicator (CEI) using the forecasts of each variable from the consensus shows where the consensus believes the economy is currently trending. The difference between the two represents the Surprise Index.

Over the last two months, the incoming economic data have worsened substantially. The economy is now trending 0.3 standard deviations below the average economic growth since 1992. While we do not believe the economy is in danger of entering a recession, the indicator is nearing recessionary levels.

If the Fed is truly data dependent, then the worsening economic data should curtail any expectation that tapering will begin shortly. Yet, even as the data have weakened, the consensus expectations have remained optimistic.

That divergence explains why the consensus remains committed to a September tapering start date but also why the Fed may wait much longer to begin.

Source: A Simple Chart Showing Why The Consensus May Be Wrong On The Start Date For Fed Tapering