And by “Saves the World” we mean “Thanks the stars that he’s not Mario Draghi”.
We’re kicking off at 2:05pm in New York (6:05pm in London), ten minutes before we find out that Ben is late and wait another ten minutes the presser is scheduled to begin. Same place as always.
As usual we’ll have incisive commentary, analyst roundups, and playful banter at the start. But mostly we’re looking forward to passing judgment on the questions in real time — our one chance to slag off Hilsenrath, our man “Hip specs” Harding, Ip and the weirdos from cable TV without them noticing — and to parsing Bernanke’s answers for clues to future policy.
What to expect obviously depends on what’s included in the FOMC statement itself, which will be released at 12:30pm. At this point, most of the media reports and analyst previews all resemble each other (though we of course single out the latest from Fedwire for its clarity).
Here’s a condensed version of what the previews have been saying…
The statement might include:
1) a commitment to announce future policy decisions dependent on meeting specific inflation and employment goals, though we probably won’t find out the targets themselves.
2) a new line or two reflecting the latest employment and growth indicators (Q3 growth, consumer spending, employment, etc…).
Unlikely but still possible:
1) a cut in interest on excess reserves, though if we get one it would be small, maybe five basis points.
2) new QE3-style MBS purchases. The latter seems like a tossup to us.
The statement almost certainly won’t include:
1) an announcement that the Fed is now targeting NGDP, though the idea has received a lot of attention from economists in recent weeks and was almost surely discussed at the meeting.
2) a new interest rate forecast to go with the traditional forecasts on growth, inflation, and unemployment.
We’ll also find out the latest Fed forecasts. Not that we think you should put much stock in them — the committee has had to ratchet down 2011 growth estimates all year and are likely to do so again — but they obviously give some sense of the FOMC’s outlook, and this will take on a new meaning should the Fed decide to take surprising action. Click here to see the forecasts from June of this year.
As for the presser, we’re quite looking forward to someone asking Bernanke about NGDP targeting. We haven’t managed to find an instance of Bernanke explicitly addressing NGDP targeting other than page 20 of this paper from 1997. Same thing for any questions about the “Evans Rule”, whereby the Fed would announce, say, that it won’t tighten until either unemployment falls below 7 or inflation rises above 3 per cent.
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And for the long version, the last preview to arrive in our inbox was from RBC Capital, and it seems about as good as any of the others we’ve seen. Here’s a lengthy excerpt:
Cutting Interest of Reserves: Extremely unlikely before February 1, when the fails fee for MBS goes into effect, slightly more probable thereafter.
On the slim chance that the Fed does cut IOER today, it would probably be just a 5bp baby step. That move would suggest that another 5bp is coming in December, and potentially another in February. In essence, because the Fed knows there are extremely damaging effects (particularly in the repo market) when rates get too low but does not know where that break point is, they might slowly move down the rate to probe just how low they can go before major structural issues arise. …
Modifying Twist: Extremely unlikely at this meeting, higher probablility in Dec or Jan. While members of the Fed have expressed disappointment that 2s have backed up due to Twist sales, any modifications such as reducing sales (making the program half twist/half QE3) this early into Twist would make it appear that the Fed is panicking over Europe. …
MBS QE3: Almost no chance at this meeting, higher probability in December or January. Rather than the statement, we will be looking for QE3 information at Chairman Bernanke’s 2:15 press conference. With the 30yr current coupon near 3% we are surprised at any suggestion that mortgage rates are not low enough. Nonetheless, MBS purchases would likely be the next leg of QE. …
Altering communications: This would entail promising not to tighten until some economic condition is reached. There is a reasonable chance this happens at this meeting, and it is likely by December (although with much more wiggle room than the market expects – FOMC members never want to eliminate their discretion by moving to a pure rules-based policy). On any condition-based announcement, the market would closely watch the FOMC forecasts to get a gauge on how long the members expect it will be before the tightening trigger is reached. …
There are a number of indicators the Fed could target:
Inflation: This is straight out of the BOJ playbook, as the BOJ had promised not to tighten until yr/yr inflation became positive. A CPI metric would be a better target than the PCE deflator, as the PCE deflator can be revised dramatically (the perception that the Fed pushed rates too low in 2003 is largely the result of the fact that core PCE, which dropped to 0.7% yr/yr, was revised up to 1.5% so the deflation fears seem overblown – no one would accuse the Fed of being overly dovish if the 0.7% was still in place). The Fed has received considerable criticism about focusing on core inflation, so it could make the mistake of targeting headline inflation. The reason to watch core is not that food and energy don’t matter, it is that the Fed can’t do anything about this year’s inflation, and the core is a better indicator of next year’s inflation than the headline (a long winded way of saying that oil prices are volatile).
Unemployment: This would indicate that the extended period will stretch far beyond mid-2013. Labor force growth has slowed, but we would expect an acceleration if job growth picked up (and people without jobs felt better about their prospects). This means even if payrolls accelerate, improvement in the unemployment rate will be modest. If the Fed announced an unemployment target, we would expect many of the effects that we saw when the Fed lengthened the extended period to be repeated – 5s and 7s would lead the rally, implied vols in the belly of the curve would be depressed, etc.
Nominal GDP: This would move the Fed toward a more formal Taylor-rule based policy. Since Taylor rules have been a fairly good gauge of Fed policy in practice, this would probably have less market impact than the alternatives.
Related link:
US Markets Live transcript 27 Apr 2011 – FT Alphaville