While admitting that the Fed “doesn’t fully understand” all the reasons behind the slower pace of growth (though it could be due to “bad luck”), the following 10 statements from Ben Bernanke’s final press conference seemed to sum up perfectly the message he wants everyone to understand (and perhaps some he doesn’t)…
*BERNANKE REPEATS TAPERING DATA-DEPENDENT (we can always come back)
*BERNANKE INFLATION CANNOT BE PICKED UP AND MOVED WHERE WANTED (hhmm)
*BERNANKE SAYS MONETARY POLICY ISN’T A PANACEA (wait what?)
*BERNANKE SAYS ACTION TODAY INTENDED TO MAINTAIN ACCOMMODATION (ok great)
*BERNANKE SEES CONCERNS OF QE IMPACT ON ASSET PRICES (but no bubbles right?)
*BERNANKE REITERATES HE WAS ‘SLOW TO RECOGNIZE THE CRISIS’ (but you got it this time right?)
*BERNANKE SEES FED FUNDS RATE BETTER TOOL THAN QE (not for the equity markets it would seem)
*BERNANKE SAYS BIGGER BALANCE SHEET INCREASES POTENTIAL QE COSTS (indeed)
*BERNANKE FED CAN’T IGNORE FINANCIAL STABILITY IN MAKING POLICY (but chooses to)
And the money shot for success…
“It requires, obviously, some luck and some good policy.”
Despite the world of mainstream media pundits proclaiming the US is recovering nicely and that a taper is priced in (and the warning that the 5Y auction gave this morning that it’s not), markets are already reacting violently to the Fed’s decision to announce a small ‘taper’ (and more dovish forward guidance)…
We now leave it to Ben and his final press conference to explain his decision… and, of course, make sure everyone remembers “QE is for Main Street”, ‘tapering is not tightening’ (despite Jim Bullard telling us it is), and just how effective ‘forward guidance’ is.
Pre-FOMC: S&P Fut 1771 (spiked pre-FOMC), 5Y 1.55%, 10Y 2.875%, VIX 16.5%, Gold $1236 (which was spiking pre-FOMC), EUR 1.376
As a reminder, here are the 4 reasons why the Fed was cornered into tapering… as we have noted numerous times before; the “taper” is all about economic cover for a forced move the Fed has to make:
1. Deficits are shrinking and the Fed has less and less room for its buying
2. Under the surface, various non-mainstream technicalities are breaking in the markets due to the size of the Fed’s position (repo markets, bond specialness, and fail-to-delivers among them).
3. Sentiment is critical; if the public starts to believe (as Kyle Bass warned) that the central bank is monetizing the government’s debt (which it clearly is), then the game accelerates away from them very quickly – and we suspect they fear we are close to that tipping point
4. The rest of the world is not happy. As Canada just noted, the US monetary policy will be discussed at the G-20
Simply put, they were cornered and needed to Taper sooner rather later…
and as Jim Bullard previously noted,
“Financial market reaction to the June and September FOMC meetings provides sharp evidence that changes in the expected pace of asset purchases have conventional monetary policy effects.
Using the pace of purchases as the policy instrument is just as effective
as normal monetary policy actions would be in normal times”
Or – in other words:
Tapering Is Tightening
And as BAML noted previously, forward guidance is ineffective as,
…policy makers are finding it harder to convince markets that central bankers have more insight into the future course of the economy and policy than they actually do. Meanwhile, markets are learning that it can be painful to rely too heavily on forward guidance when the risk/reward of being long fixed income is asymmetrical when close to the zero lower bound.
Full Statement redline below:
The “swap” of $10 billion of asset purchases for a lower employment threshold and lower-rates-for-longer forward guidance knne-jerked stocks dramatically higher (for now). But while that was occurring, the Wall Street Journal’s Hon Hilsenrath was busy preparing 712 words in a record-setting 3-minutes to explain how the Fed remains data-dependent… and will remain dovish for longer than previously thought.
The Federal Reserve said it would reduce its signature bond-buying program to $75 billion per month, taking a step away from a policy meant to recharge economic growth, and said that it will continue in “further measured steps at future meetings” if the economy stays on course.
After months of intense discussion at the Fed and in financial markets, the Fed’s policy-making committee announced Wednesday it would trim its purchases of long-term Treasury bonds to $40 billion per month, a reduction of $5 billion, and cut its purchases of mortgage-backed securities to $35 billion per month, a reduction of $5 billion.
“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases,” the Fed said in its formal policy statement.
The Fed also sought to enhance its commitment to keep short-term interest rates low for a long time after the bond-buying program ends. Fed officials inserted new language in the policy statement that stressed they will be in no rush to raise rates once unemployment reaches the 6.5% threshold the central bank has set out as the point at which they would start considering raising rates, as long as inflation remains in check.
The Fed said that “it likely will be appropriate to maintain the current target range for the federal funds rate well past the time” that the jobless rate dips below the 6.5% threshold, “especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.”
Short-term rates have been pinned near zero since late 2008. Most Fed officials expect to keep interest rates low well into the future. In their latest economic projections, also out Wednesday, 12 of 17 Fed officials said they expected the central bank’s benchmark interest rate, which is called the fed funds rate, to be at or below 1% by the end of 2015. Ten of 17 officials expected the rate to be at or below 2% by the end of 2016.
The Fed acknowledged concerns that inflation continues to run stubbornly below the central bank’s 2% target, saying that it is “monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.” The Fed’s preferred inflation gauge, the price index for personal consumption expenditures, increased just 0.7% in October from a year prior, according to a Commerce Department data release earlier this month.
Officials by and large stuck with their economic forecasts for 2014, making only slight adjustments to projections of growth, unemployment and inflation that they made in September. In the statement, officials said that risks to the economy and jobs market have become “more nearly balanced.”
Via Goldman Sachs,
The FOMC decided to cut the pace of its asset purchases to $75bn/mo, but offset this with a qualitative enhancement to the forward guidance. The Committee’s assessment of the economic outlook was somewhat more upbeat. We see today’s statement as slightly hawkish relative to expectations. The fact that President Rosengren dissented and President George did not is consistent with that.
1. The Committee reduced the monthly pace of its asset purchases to $75bn, trimming both Treasury and MBS purchases by $5bn.Regarding the forward-looking outlook for further cuts to purchases, the statement indicated that “the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.” The reduced pace of purchases will take effect in January and the allocation of Treasury purchases across maturities will remain unchanged. The Committee likely expects to conclude the asset purchase program in the second half of 2014.
2. Additional qualitative forward guidance was provided. Specifically, “the Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.” We see “well past” as potentially representing as much as one-half percentage point. In this sense it is similar to a reduction in the unemployment threshold to 6.0%, although without the degree of commitment that such a reduction would entail.
3. The economic assessment was somewhat brighter. In particular, “labor market conditions have shown some further improvement” was upgraded to “labor market conditions have shown further improvement.” In addition, the assessment of the drag on growth due to fiscal policy was slightly more upbeat, noting that “the extent of restraint may be diminishing.” The description of inflation was unchanged in the first paragraph, although the Committee added that it is “monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term,” indicating slightly higher concern about the inflation outlook.
4. Boston Fed President Rosengren dissented to the decision to taper asset purchases, while Kansas City Fed President George?who had previously been a hawkish dissenter?voted with the Committee.
5. With regard to participants’ economic projections, the mid-point of the central tendency of the unemployment rate was lowered to 7.05% in 2013Q4, 6.45% in 2014Q4, 5.95% in 2015Q4, and 5.55% in 2016Q4. Real GDP growth was raised by 10bp to 2.25% at end-2013, but the longer-run projection was reduced by 5bp to 2.3%. Participants reduced their end-2013 and end-2014 core PCE projections by 10bp to 1.15% and 1.5% and reduced their end-2015 and end-2016 projections by 5bp to 1.8% and 1.9%.
6. The median participant’s forecasts for the funds rate (the “dots”) remained at 0.13% at end-2013 and end-2014, fell 25bp to 0.75% at end-2015, and fell 25bp to 1.75% at end-2016. The median projection for the longer-run rate remained 4.0%. It is possible that Vice Chair Yellen was one of the participants who reduced their federal funds rate projections.
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