If analyst comments in our inbox are anything to go by, the latest FOMC minutes, released on Wednesday, provided nothing much to write home about. Everything revealed was pretty much as expected.
One thing did prompt our eyebrows to raise, however. More on that below, but first here’s some of the reaction. Stephen Lewis at Monument Securities wrote:
The minutes of the FOMC meeting on 28-29 October sprang few surprises. Compared with earlier meetings, FOMC members gave more prominence to the risks stemming from worsening conditions elsewhere in the world but ‘many participants’ expected the impact of foreign developments on US growth to be limited.
We had a chat with the FT’s US markets editor Mike MacKenzie about Wednesday’s FOMC statement. There were masks:
Full text here. The highlights:
– Large scale asset purchases have ended, as expected (though remember that the Fed is still reinvesting the principal on MBS and rolling over maturing treasuries). Read more
It’s hard to say which was more surprising — the passages in Janet Yellen’s inequality speech last week that appealed to American values, or the topics she chose to omit entirely.
To start with the latter, the interdependent relationship between inequality and economic growth has become a mainstream topic of economic debate in recent years, and a very contentious one. Read more
From the transcript of St Louis Fed president James Bullard’s interview with Bloomberg Television:
I also think that inflation expectations are dropping in the U.S. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target. And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December. So… continue with QE at a very low level as we have it right now. And then assess our options going forward. …
Since I wrote about the Fed debate ten days ago, the market consensus has moved rapidly towards a change in the Fed’s “considerable time” language this Wednesday. I was cautious about the timing, however, because this is not straightforward – coming up with new language is quite a challenge.
This is a (very long) attempt to think through the Fed’s options. The bottom line is that “considerable time” may survive in some form on Wednesday, but if so, I’ll be surprised if there is not a significant change to the statement that sets up its eventual departure. Read more
By most accounts — the musings of Wall Street strategists and media Fed watchers, speeches by FOMC members, countless online FOMC previews — momentum is building for the Fed to soon change its “considerable time” language, and to give clearer guidance on when and why it will start raising rates.
Will such changes be included in the FOMC statement that will be released on Wednesday? Read more
Loretta Mester, the president of the Cleveland Fed, gave her first speech on Thursday since taking over from her predecessor Sandra Pianalto.
From the remarks, our emphasis: Read more
Better employment situation reports. Strong second-quarter growth. Inflation rising steadily. Recent congressional testimony from Janet Yellen admitting that the labour market was improving more quickly than the Fed had forecast.
Yet despite acknowledging the recent moves in the unemployment rate and inflation towards the Fed’s targets, Wednesday’s FOMC statement also added that “a range of labor market indicators suggests that there remains significant underutilization of labor resources”. Read more
The Federal Reserve’s June minutes are out and as usual offer good insight into the FOMC’s thinking when it comes economic confidence and recovery (more positive) as well as its opinion on rates (still dovish).
But they also reveal a new preoccupation with matters related to exit strategy and financial plumbing.
Here’s the section we’re referring to (H/T David Beckworth)
While generally agreeing that an ON RRP facility could play an important role in the policy normalization process, participants discussed several potential unintended consequences of using such a facility and design features that could help to mitigate these consequences. Most participants expressed concerns that in times of financial stress, the facility’s counterparties could shift investments toward the facility and away from financial and nonfinancial corporations, possibly causing disruptions in funding that could magnify the stress.
Zoltan Pozsar, in a new study published by the US Treasury Department’s Office of Financial Research, has developed an intriguing new framework for understanding the interaction between global finance and macroeconomic trends.
It includes important sections about the potentially large implications of the Fed’s new reverse repo facility and the relationship between stagnationist trends and the financial markets. Read more
The thresholds had a one-time gig, doing their job so well that they made themselves obsolete. How very New Economy of them.
Well, sort of. According to Janet Yellen’s reasoning for having ditched the thresholds as a part of the Fed’s forward guidance, they served their purpose at a time when it still seemed possible that inflation would climb above the Fed’s target even while the unemployment rate was still well above its natural level. Their presence was meant to reassure markets that the Fed wouldn’t rush to tighten in such a scenario, and in the meantime they also communicated to markets that policy was data contingent rather than calendar-based. Read more
From a passage at the beginning of the December 2008 meeting transcript, where Ben Bernanke explains the difference between Japanese quantitative easing and the Fed’s combination of funding facilities, backstops and QE1 (which included agency debt and agency MBS):
In some respects our policies are similar to the quantitative easing of the Japanese, but I would argue that, when you look at it more carefully, what we’re doing is fundamentally different from the Japanese approach. Let me talk about that a bit. Read more
Given the release of the 2008 FOMC transcripts, the St Louis Fed has shrewdly tweeted a speech from last year by its president, James Bullard, arguing that the real-time economic data in 2008 was badly trailing events.
The FOMC transcripts show that Bullard, as late as September 2008, was as worried about high inflation as about the possibility of a deep and protracted downturn. Read more
The final FOMC statement of the Bernanke era included nothing unexpected, which didn’t stop markets from expressing disappointment.
But looking ahead, there are at least two reasons why the Yellen Fed might soon consider, or at least should consider, downplaying the unemployment rate threshold in its forward guidance in favour of a greater emphasis on inflation. Read more
Many pixels will be spilled about the meaning of Ben Bernanke’s decisions in his last FOMC meeting as chair, but really they’re just the culmination of a project he has been working on since the summer.
Bernanke indicated during today’s presser that today’s changes — the most important being the start of tapering and the language strengthening the forward guidance — were meant to neutralise each other in terms of their impact on the overall accomodativeness of monetary policy. Read more
The WSJ reports Tuesday night that the White House plans to nominate Janet Yellen to replace Ben Bernanke as Fed chair on Wednesday. Robin Harding confirmed as much.
FT Alphaville welcomes the choice, but we’ve already written about her qualifications at length (see here and here). Read more
Click to enlarge the updated dove-hawk breakdown from Credit Suisse. Read more
After his Congressional testimony in May and the FOMC meeting in June, Ben Bernanke struggled to convince the markets that decisions regarding QE would be state-contingent rather than predetermined — and more to the point, that monetary policy would be accomodative for as long as necessary.
Did he finally get his message across by delaying the widely expected taper? Maybe, if judging by the reaction of Treasury yields and equity markets. Read more
To what extent does the Fed’s decision this week on whether to taper — and if so, by how much — rely on a trend that nobody can explain?
Many, many commentators noted after the August employment situation report that the unemployment rate has dropped in recent years largely because of a decline in the labour force participation rate. And after adjusting for demographic trends, which had been expected, it’s unclear how much of the decline is down to structural versus cyclical reasons. Read more
Not that we needed more convincing, but…
With the exception of certain commentators who get paid ostensibly to act like inveterate morons, nobody has doubted Janet Yellen’s record of analytical prescience in the past decade. Read more
Larry Summers has his haters, and Tuesday’s report from Ezra Klein that Summers is now the frontrunner to replace Ben Bernanke as the next Fed chair has doubtless set them off.
On this particular issue, I’m not really one of them. Some of the mistakes of his past, such as his role in deregulating derivatives (the Brooksley Born episode) or the Harvard interest rate blowup, don’t really tell us much about his capacity to guide macroeconomic stabilisation policy. Read more
Michael Cloherty of RBC Capital Markets makes an interesting point in a short note today about the role played by market structure in pushing interest rates higher than the Fed expected when Bernanke telegraphed the eventual tapering strategy.
Yes, Cloherty writes, markets might have overreacted — but they are more jittery than in normal times because financial markets have increased their sensitivity to reabsorbing credit risk: Read more
Several FOMC members have had their say since last week’s meeting, with Bullard explaining his dovish dissent and Kocherlakota encouraging the use of 7 per cent unemployment as a threshold for scaling back asset purchases rather than as a stopping point.
Fisher, on the other hand, was feeling good and using fun analogies. (Kocherlakota and Fisher are non-voting members.) Read more
James Bullard weighed in this morning explaining his dissent to the FOMC statement on Wednesday, and now he has expanded on his thoughts in an interview with Neil Irwin at Wonkblog:
N.I.: So is your objection and reason for dissenting that you disagree with the pathway for policy that was laid out, of ending QE when unemployment hits about 7 percent and raising short-term rates when unemployment is about 6.5 percent or lower? Or is it that you disagree that now was a good time to lay that out? Read more
Before the presser on Wednesday, Ben Bernanke’s vague definition of “substantial improvement” in the outlook for labour markets resembled the old line about porn: he’ll know it when he sees it.
The phrase was originally intended to represent the scenario under which asset purchases would end, not when they would be slowed (or “tapered”). And the purpose of this round of quantitative easing was to “increase the near-term momentum” of the economy until growth was self-sustaining, and conducted in the context of price stability. Read more
Highlights follow, beginning with inflation:
Both headline and core PCE inflation in the first quarter came in below the Committee’s longer-run goal of 2 percent, but these recent lower readings appeared to be due, in part, to temporary factors; other measures of inflation as well as inflation expectations had remained more stable. Accordingly, participants generally continued to expect that inflation would move closer to the 2 percent objective over the medium run. Nonetheless, a number of participants expressed concern that inflation was below the Committee’s target and stressed that future price developments bore careful watching. Read more
I would say that we will be looking for sustained improvement in a range of key labor market indicators, including obviously, payrolls, unemployment rate, but also others like the hiring rate, claims for unemployment insurance, quit rates, wage rates and so on, looking for sustained improvement across a range of indicators, and in a way that is taking place throughout the economy.
– Ben Bernanke, during Wednesday’s presser, when asked which indicators he would consider when deciding when it was time to end or slow the pace of asset purchases. Read more