We noted a few weeks ago that the futures market was probably getting ahead of itself in predicting that the Fed would begin tightening policy sometime after August of this year.
This passage from the minutes of the last FOMC meeting…
While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program, and some noted that more time was needed to accumulate information on the economy before considering any adjustment. Members emphasized that the pace and overall size of the purchase program would be contingent on economic and financial developments; however, some indicated that they had a fairly high threshold for making changes to the program.
… essentially reinforced our belief.
What, then, will the Fed be doing all year? Ben Bernanke is giving a testimony entitled “The Economic Outlook and Monetary and Fiscal Policy” before Congress on Friday at 9:30am, so we’ll know more then.
In the meantime, we recommend this smart piece by Neil Irwin of the Washington Post on what to expect:
With policy in a holding pattern, Chairman Bernanke and the Fed will be occupied in other ways: primarily monitoring the economy, trying to gauge whether it is recovering and determining what role the Fed’s actions played in any improvement. And they will be on the watch for emerging risks that could undermine the path of steady growth – the most obvious possibilities being further financial troubles in Europe or a failure of the U.S. government to put its own finances on a sustainable footing.
Bernanke will probably use his bully pulpit to nudge Congress and the Obama administration toward a long-term plan for reining in the budget deficit, which will be about 9 percent of gross domestic product this year. That pitch will begin Friday, when he testifies before the Senate Budget Committee, his first appearance before lawmakers since September.
This is essentially just following the predetermined script: stump for more short-term fiscal stimulus to help get the economy out of its slump while pushing for medium-term deficit reduction to maintain confidence in the country’s finances.
The short-term fiscal stimulus (or if you prefer, the fiscal anti-contractionary measure) took the form of December’s tax cut compromise, which arrived just before the changeover to a somewhat more hawkish FOMC voting membership and the Republican takeover of the House. There could well be some internal pressure on Bernanke to tighten this year (especially if inflation starts creeping back up towards two per cent), but we suspect he’ll resist it unless the recovery turns out to be even more vigorous than is now expected.
Related links:
The rise in Fed funds futures rates – FT Alphaville
Minutes of the December FOMC meeting – FT Alphaville
In 2011, the Fed will be in watch mode – Washington Post
FOMC composition and future monetary policy – FT Alphaville