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
During the presser following last June’s FOMC meeting, Ben Bernanke cautioned that another round of QE shouldn’t be undertaken lightly because it may have “various costs and risks associated with it with respect to market functioning, with respect to financial stability, with respect to the exit process”.
The next round was launched in September, of course — after (though certainly not just because of) Fed staff economists presented an analysis to the FOMC concluding that there was “substantial capacity for additional purchases without disrupting market functioning”. Read more
From a terrific post by Andy Harless:
Machismo is a type of commitment mechanism. Read more
The quotes below speak for themselves, and if you’re on Twitter then check out the #FOMC hashtag, where the gang at the NYT and a few others have rolling updates as they make their way through the statements.
Our earlier post is here, and emphasis ours in each excerpt…
Stockton (chief economist), September: Read more
MR. KOHN. Before we get illegal here, I am honored and pleased to nominate Ben Bernanke to be Chairman of the Committee…
They’re all here, released on Friday: transcripts of previously secret Fed meetings in the first year of the credit crisis. Read more
Neil Irwin of Wonkblog has an excellent preview of what to expect when the Fed releases the transcripts from the 2007 FOMC meetings. (The Fed doesn’t say in advance when they’ll be posted, but we’re expecting them anytime now, possibly even today.) Read more
We still think the minutes of the December FOMC meeting — specifically their revelation that “several” committee members believe asset purchases should be slowed or stopped by the end of this year — were wrongly interpreted by some as a hawkish shift.
Bernanke explained at the September presser that asset purchases, purpose of which he said was “to increase the near-term momentum of the economy”, would continue until the outlook for labour markets had improved “substantially”. Read more
These minutes are for the meeting at which the Fed announced its switch to a version of the Evans’ Rule. While that change was expected, it wasn’t expected to be made as soon as it ultimately was.
The most interesting bit from the minutes below in bold, followed by some quick commentary. Read more
We’re starting at 2:10pm EST (7:10pm in London) at the usual place.
We were puzzled a few weeks ago as to why Charles Evans had changed his eponymous rule from 7/3 to 6.5/3.5. Turns out he might have just been aligning himself with what was coming.
Today the FOMC abandoned using a calendar date (most recently mid-2015) as its approximate guide to when it would begin raising rates. Instead: Read more
Expected changes, unexpectedly soon. Not just the widely anticipated announcement that the Fed would continue buying long-end Treasuries after the end of Twist, but also a switch from using a calendar date (previously set at mid-2015) to economic objectives for estimating approximately when the committee will raise rates in the future.
We’ve highlighted the important lines in the statement below, and we’ll have more coverage later: Read more