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
It was about this time last year that we noted how the voting membership of the FOMC would become more dove-ish in 2012. Of course, at the time we had no idea that Jeremy Stein and Jerome Powell would be appointed and confirmed this year, making the committee even more receptive to Ben Bernanke’s decisions.
Surely this made it easier, at least on the margins, for Bernanke to move in the direction of Evans/Woodford/Sumner, which he finally did at the big September meeting (also helping was what appeared at the time to be another post-winter slowdown in the US economy). Read more
Nomura economist David Resler, in a valedictory research note, passed along the following chart as part of his thoughtful meditation on the Fed:
Compared with the last FOMC meeting, the one next week could be a snooze.
It’s a two-day meeting, but there won’t be a presser afterwards or an updated Summary of Economic Projections when it ends. Just a statement. Read more
It’s Fed speech week, but rather than spending much time supporting or criticising last week’s decision by the FOMC, Minneapolis Fed president Narayana Kocherlakota has instead drawn inspiration from Charles Evans and introduced his own conditionality-based “liftoff plan”:
As long as the FOMC satisfies its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent. … Read more
Among the stealth victories won by Ben Bernanke last week was that he made it easier to neutralise a hawkish shift within the FOMC into the future.
Tim Duy has it right, we think, and now that the post-meeting speech wars have begun, it’s worth taking a closer look. Read more
A cheat sheet for the hawk-dove breakdown on the FOMC (click to enlarge, via Credit Suisse):
What an intriguing day for monetary policy.
Others have rightly noted that this is a step towards the recommendations of Michael Woodford and, perhaps, NGDP level targeting. (And Tyler is right: don’t forget Scott Sumner in all this). Read more
Tune in at 2:05pm EST (7:05pm in London) today for a special edition of US Markets Live and join the rabble to watch The Bearded One be questioned by our colleagues in the media.
Our preview of today’s Fed activity is here, and we also recommend Robin “Hip Specs” Harding’s post at Money Supply. Read more
In a great post over at Money Supply, Robin Harding explains the main source of suspense for today’s FOMC statement and presser (our emphasis):
For me, the question of what the Fed will do is far less interesting – and far less in doubt – than how the Fed will do it. This will not be a pro forma repeat of previous actions. As Mr Bernanke’s speech shows, the Fed is trying to address grave concerns about the labour market. The crucial issue is whether and how they tie any action to the state of the economy. Read more
It’s what you’ve been waiting for. Read more
There was a seemingly minor item in the FOMC minutes released yesterday that didn’t get much attention but that, naturally, interested us quite a bit.
The participants noted that the Fed staff had presented an analysis showing “substantial capacity for additional purchases without disrupting market functioning”. But the staff part of the minutes offered no details of this analysis. Read more
A couple of charts from Barclays economists showing the relative contribution of food to headline and core CPI:
The biggest change is in the very first paragraph. In June the Fed had written that the economy “has been expanding moderately”. Now economic activity has “decelerated somewhat over the first half of this year.” Read more
You can consider this a preview of both next week’s meeting and the one in September, as various reports have indicated that he Fed may wish to wait for more economic data before deciding what to do next.
As usual we won’t play the percentages; instead we’ll just run through the possibilities and list a few of the potential complicating factors involved with each of them. Read more
I guess I would add to that, though, that, you know, each of these nonstandard programs does have various costs and risks associated with it with respect to market functioning, with respect to financial stability, with respect to the exit process, and so I don’t think they should be launched lightly. I think there should be some conviction that they’re needed, but if we do come to that conviction, then we’ll take those additional steps.
— Ben Bernanke on further unconventional Fed measures, at June’s FOMC presser. (Page 8 here, in response to Binyamin Appelbaum’s question.) Read more