FX MONETARY POLICY
we have no clarity on what might drive a decision to move forward with QE tapering at the October or subsequent FOMC meetings. … At this point who knows what that means specifically in terms of near-term incoming data looking ahead to the October 29-30 and December 17-18 FOMC meetings. We don’t have any good sense of what the Fed’s reaction function is at this point, so our initial baseline is flip a coin on QE tapering at upcoming meetings.”
Another example of how too many information can be confusing and, more importantly, so inconsistent to undermine long term credibility, was conveyed by the FOMC members projections on interest rates path and predictions of macroeconomic variable. Te forecast for unemployment rate at the end of 2016 (for the first time produced at the last FOMC since before they stretched only to the end of 2015) is 5.65% (5.4%-5.9% range). For inflation is 1.95% (1.9%-2.0% range). We could call them condition of full employment with inflation at target, almost a perfect world. Te Taylor Rule is a well know model to estimate short term interest rate equilibrium with inflation and output gap (unemployment rate could be a way to estimate the output gap). It has many versions and it is oſten cited in Fed’s research papers as a reference point. Well, any rough application of this model would point to a 4% for equilibrium short-term interest rate (2% for inflation + 2% real growth with small or no output gap). Maybe 3.5% using a more cautious approach like the Balanced Approach Taylor Rule, the favourite version of Janet
Source: Goldman Sachs Global Investment Research, Federak Reserve Board
Yellen. Te median projection from FOMC members for Fed Funds at the end 2016 is 2% (according to the yield curve the market was quoting roughly 2.30%-2.35% before the FOMC and adapted quickly to the Fed ‘suggestion’ in few hours aſter the meeting).
A Goldman Sachs chart showing what Fed Funds suggested by the Taylor Rule compared with FOMC members projections (the’dots’).
In the Q&A Bernanke has been (obviously) questioned on such an inconsistency. His reply has not been particularly convincing or precise: “the primary reason for that low value is that we expect that a number of factors—including the slow recovery of the housing sector, continued fiscal drag, perhaps continued effects from the financial crisis—may still prove to be headwinds to the recovery. And even though we can achieve full employment, doing so will be done by using rates lower than, sort of, the long-run normal. So, in other words, in economics terms, the equilibrium rate,
48 FX TRADER MAGAZINE October - December 2013
the rate that achieves full employment, looks like it will be lower for a time because of these headwinds that will be slowing aggregate demand growth”. A convoluted answer which is almost an admission that they do not really believe growth will reach and stay around 3%, as from their projections, in the next three years, in my view. In fact the market, aſter a brief celebration (new historical highs for the US stock markets), seems to be following such a hint more than correcting the initial strength.
STILL BELIEVING IN QUANTITATIVE EASING OR NOT? (never or anymore)
Trade-off between benefits and costs of keep growing Fed balance sheet has been undoubtedly worsening. I wrote extensively about it one year ago in the October 2012 edition, “Bernanke goes all-in: QE-infinity”. Risks of distorting markets, inflating an asset bubble, worsening the wealth divide and eventually creating too much inflation
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92