The past week has been another important one for Fed watchers, a group which nowadays seems to include almost every active investor in the financial markets. Following the decision of the Senate on Thursday to ban filibustering on Presidential nominations to many important federal posts, it has been suggested by Morgan Stanley that Ms Yellen might take up her position as Chair in time for the next meeting of the FOMC on 17-18 December, two meetings earlier than previously expected.
Furthermore, according to Neil Irwin, President Obama will now find it easier to appoint at least two new monetary doves to support Ms Yellen on the Board of Governors next year. This will offset what might otherwise have been a shift towards hawkishness on the FOMC, since regional Presidents Fisher and Plosser (both hawks) are rotating into voting status, and the unannounced new President of the Cleveland Fed may turn out to be “on the hawkish end”, according to J.P. Morgan.
These personnel changes will create their own uncertainty. But, in addition, the Fed’s monetary strategy is clearly in a state of flux, with its approach to tapering having developed markedly in recent weeks. A new “separation principle” seems to be emerging, and it explains why the FOMC seems eager to begin winding down its asset purchases in the near future, while relying even more heavily than before on “lower for longer” guidance on forward short rates. This could have important ramifications for markets. Read more