MONETARY POLICY
Governor Jeremy Stein recently to
adopt
urged a
by the Fed “transparent
and predictable” process for tapering that would reduce the monthly asset purchases
a “set
amount for each further 10 basis point decline in the unemployment rate”.
FX
Photographer: Andrew Harrer/Bloomberg conference from the Chairman
followed by extensive Q&E (BCE style). Another effort has been made in supplying a more explicit reaction function regarding future moves on interest rates, a push now called by everybody Forward Guidance. Tey started to
(“extended period of time”) or
state for how long till
when they intended to keep interest rates “exceptionally low” and later on began to give explicit conditions needed to start hiking. Currently we are told that unemployment rate has to descend below the 6.5% threshold for the Federal Reserve to start thinking about a hike.
Overall it seems a sensible effort. Someone is even asking to go further down this
road. It is the case of
Governor Jeremy Stein (still a potential runner, even if a very low probability one, for Bernanke replacement) which recently urged the Fed to adopt a “transparent and predictable” process for tapering that would reduce the monthly asset purchases by a “set amount for each further 10 basis point decline in the unemployment rate”. He said: “My personal preference would be to make future step-downs a completely deterministic function of a labor market indicator, such as the unemployment rate or cumulative payroll growth over some period. For example, one could cut monthly purchases by a set amount for each further 10 basis point decline in the unemployment rate.” “But I do think that, at this stage of the asset purchase program, there would be a great deal of merit in trying to find a way to make the
link to observable data as mechanical as possible.”
But let’s see what happened at the
last FOMC on September 18th with the ‘no tapering’ decision. While everybody was set-up for anything between 10 and 20 billion of reduction in the LSAP (Long Term Asset Purchase program, a.k.a. QE3) with no much dispersion around the median expectation, the Fed balked giving a clear example of how things can backfire: too much information and guidance
ex-ante
can easily generate more confusion than necessary when deviating just a little from the script. Morgan Stanley commented like this aſter the FOMC rendering quite well a pretty common feeling among observers. “At this point
FX TRADER MAGAZINE October - December 2013 47
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