Google Analytics

Wednesday, May 1

1st May - Special: FED Watch

A collection of articles I've linked to previously, from latest to older. This post will be updated as the events unfold. Previous Fed Watch here.

Last update 06:30 2-May


FOMC meeting - surprisingly few changes but bias softerDanske Bank (pdf)
The Fed statement was a bit surprising as the tone on growth and employment was kept fairly unchanged despite the recent weakness in data. However, they turned slightly more dovish on the policy description as they said that they are prepared to both increase or reduce asset purchases. Hence, it opens a slight door that a rise in asset purchases is also possible should growth deteriorate more than expected. We expect the Fed to keep the current pace of asset purchases till the end of the year.

FOMC Leaves Policy UnchangedTim Duy’s Fed Watch
The urge to taper off quantitative easing has lessened since the last meeting. That pushes the beginning of the end back to the later back of the year.  The door is open to additional stimulus as well, but I suspect that it would have to be driven by the employment side of the mandate.  Clear evidence of a deflationary threat is likely necessary to drive action on the other side of the mandate; such a threat seems unlikely in an expanding economy.

Fearful symmetryFree exchange / The Economist
Fed officials thus entered this week's meeting with cross-cutting pressures: an underlying view that QE should start to taper off soon; and economic data that undermined the case for such a tapering. The sentence the Fed added to this week's statement was a reminder to the market that the fate of QE is tied to the fate of the economy, and tapering is not a done deal if the economy doesn't hold up its end of the bargain.


No Surprises from the Fed--QE on CourseMarc to Market

Fed prepared to alter pace of QE – slightly more dovishNordea

Redacted Version of the May 2013 FOMC StatementThe Aleph Blog
Side-by-side comparison

Fed Statement TrackerWSJ
Compare changes between any two statements – beginning from 2007.

A possible step towards numerical guidance for QE?alphaville / FT
During the presser following the March FOMC meeting, Ben Bernanke made two comments suggesting that its communications policy regarding asset purchases would shift in the direction of its policy for interest rates.

Parsing the Fed: How the Statement ChangedWSJ

Fed Maintains QE Pace, Prepared to Alter as Economy EvolvesBB
Fed stresses could boost or curb pace of stimulusReuters
Fed will keep buying $85 billion in bonds each month to keep interest rates low and spur growth, but added it could lift or taper this pace of purchases depending on the economy's path.

The Fed’s Holding a Punch Bowl in a Painted CornerWSJ

Commodities Jump But Stocks And Bonds Unimpressed By Fed StatementZH

FOMC Statement Post-MortemZH

The Fed's QE Exit Will More Than Quadruple Interest Costs For The USZH

What About Inflation?Tim Duy’s Fed Watch
The Fed is supposed to have a dual mandate.  Dual, as in two.  Maximum employment and price stability.  One would think that failing at the latter would be at least as important as failing at the former.  Perhaps we are learning that the Evan's rule is flawed - it should not be about only conditions before which the Fed considers removing stimulus, but also conditions by which the Fed deliberately considers adding additional stimulus. A two-side Evan's rule is needed.

Just a Few Weeks Makes a World of DifferenceTim Duy’d Fed Watch
he FOMC statement should shift to indicate the softer economy and falling inflation numbers; I am watching for how much emphasis they place on the latter as a signal as to the likelihood of easing further in future meetings.  Like most, I don't anticipate an expansion of the program at this juncture.

Fed unlikely to expand QE – FOMC previewNordea
Despite the recent round of weak data we do not expect an overly dovish tone to the post-meeting statement tomorrow. Still, a potential surprise would be if the FOMC is worried about disinflation.

FOMC preview, May 2013Money Supply / FT
This FOMC meeting is unlikely to generate much action beyond tweaks to the language on the economy. The next move is still likely to be a taper of QE3, but unless there is a rapid turn in the data, September now seems the earliest plausible date.

Why the Fed probably won't expand QE on WednesdayWP
1) Fed leaders have been sensitive to the risk that through the quantitative easing they could completely take over the market for U.S. Treasury debt 2) Maybe quantitative easing doesn’t affect the economy so much on its own terms, by pushing money into the financial system. Maybe it is more important as a communications tool.

FOMC Preview: A softer toneDanske Bank (pdf)

The Trapdoors at the Fed’s ExitEconoMonitor
Nouriel Roubini: The exit from the Fed’s QE and zero-interest-rate policies will be treacherous: Exiting too fast will crash the real economy, while exiting too slowly will first create a huge bubble and then crash the financial system. If the exit cannot be navigated successfully, a dovish Fed is more likely to blow bubbles.

Is Monetary Policy Capable of Offsetting Fiscal Austerity?Macro & Musings
So Mike Konczal’s assessment of this experiment is that monetary policy has not been able to offset fiscal austerity. Paul Krugman  agrees as do other observers who question the effectiveness of monetary policy in a liquidity trap. I agree that there is an interesting experiment going on, but Konczal and Krugman (K&K) oversell what it means and ignore other recent developments that shed light on the efficacy of monetary policy.

Undoing central bank balance sheet expansionsFatasmihov
While it might not be an example for all advanced economies it is useful to point out that some central banks, such as Japan and Sweden have seen large declines in the size of their balance sheet in recent episodes (Japan in the mid-2000a, Sweden in the Fall of 2010) without any disturbance to the financial sector or interest rates.

FOMC Preview: Inflation WatchCalculated Risk
Expectations are the FOMC will take no action at this meeting…Since the most recent meeting in March, the incoming data has been a little weaker, so the FOMC will probably adjust the wording of the statement.

Monetarism Falls Short (Somewhat Wonkish)Krugman / NYT
The Fed versus fiscal policy.

The great economic experiment of 2013: Ben Bernanke vs. austerityWonkblog / WP
If you look at macroeconomic policy since last fall, there have been two big moves. The Federal Reserve has committed to much bolder action in adopting the Evans Rule and QE3. At the same time, the country has entered a period of fiscal austerity. Was the Fed action enough to offset the contraction?

Can the Fed offset contractionary fiscal policy?Free exchange / The Economist
We could get close to a proper experiment if the Fed explicitly expressed a goal of above-target inflation (or, better still, a level of nominal output consistent with some catch-up growth) and declared its willingness to do what it took to get there. If it did that and failed to hit the announced goal then we could say with reasonable confidence that fiscal policy trumps monetary policy. Maybe we'll get that but we probably won't.

Everything you ‘know’ about the Fed is wrongMarketWatch
Commentary: 5 misconceptions about the effects of QE and monetary policy

Possible Fed Successor Has Admirers and FoesNYT
Ms. Yellen is now widely viewed as a logical candidate to succeed the current Fed chairman, Ben S. Bernanke, when his term ends in January 2014.

Fed’s Balance Sheet Could Take Nearly 10 Years to NormalizeWSJ
It may take the Fed nearly a decade to bring its massive balance sheet back toward a more historically normal size, Goldman Sachs economists argue in new research.

How does inflation matter?Free exchange / The Economist
If the Fed believes that its credibility is the reason inflation has been stable during the recovery, then it will almost certainly continue to do too little and unemployment will eventually settle a natural rate substantially higher than the pre-crisis level. If, on the other hand, it determines that wage rigidities are mostly responsible for stable inflation, then the Fed must actively seek a higher inflation rate in order to increase employment growth.

Monetary Policy and Financial StabilityTim Duy’s Fed Watch
If Kocherlakota is correct and monetary policy can only pursue the dual mandate in the context of financial - and, by extension - macroeconomic instability, then we really need to consider which part of the dual mandate needs to be loosened to reduce the reliance on financial instability.  My fear is that if Fed policy makers were asked this question, they would unanimously answer that it is the full-employment portion of the mandate that should be jettisoned.

Fed's Bernanke sees no U.S. inflation risks: NowotnyReuters
Bernanke told global policymakers he sees no risk to inflation in the United States, ECB Governing Council member Ewald Nowotny said on Saturday.

Baby it’s cold outside: monetary policy as outer wearMacroScope / Reuters

Fed's easy policies necessary as a parka in winter: KocherlakotaReuters
The Fed’s ultra accommodative policies will inevitably result in financial market instability for years but such risks are necessary to boost employment and inflation, a top U.S. central bank official said on Thursday.

Have the inflation-paranoid capitulated?alphaville / FT

Several Central Bankers Note Tapering Not a Done DealWSJ
Talk of tapering Fed bond buying has dominated the monetary policy debate over recent weeks. But over recent days, several central bankers have reminded market participants pulling back is not a done deal.

Bullard Concerned About Low InflationTim Duy’s Fed Watch

Another Spring Slowdown?Tim Duy’s Fed Watch
The data flow is not as uniformly positive as it seemed just a month ago.  Arguably, we are experiencing yet another spring slowdown.  This should trigger some monetary policymakers to reassess their predictions that QE could be safely terminated at the end of this year.  But there may be a contigent that has dug in its heels on the issue and are asking themselves "how bad does the data have to get to continue assets purchases"

Plosser: Now Is A Good Time To Revisit Tightening Plan – WSJ
Evans: U.S. Economy Is ‘Definitely Improving’ – WSJ
Dudley Suggests No Urgency in Paring Back QE3 – WSJ
Yellen Doesn’t See Excessive Risk Taking – WSJ
Tapering Talk: What Fed Officials Are Saying About Winding Down Bond Purchases – WSJ

Fed May Have to Tolerate Inflation to Fix Labor ProblemWSJ
The Fed may have to push the unemployment rate beyond the point that it starts generating inflation if it wants to heal underlying labor-market weakness, a paper written by two economists working at the IMF argues.