Robin Harding

The most newsy point from NY Fed president William Dudley’s speech today was his call for a change in exit strategy, urging the central bank to reinvest in its mortgage portfolio. But there was a lot more going on in the speech: Mr Dudley put a dovish spin on the Fed’s inflation target. He said bank regulation may be driving down neutral interest rates, and he put markets on notice that how they price bonds will decide how the Fed changes interest rates.

(1) Inflation is coming

Mr Dudley’s tone on inflation was different to the isn’t-it-worringly-low type of remarks that Fed officials have tended to make recently. Instead, he expects inflation to head upwards, and seemed to be testing arguments for why Fed policy should not react.

“With respect to the outlook for prices, I think that inflation will drift upwards over the next year, getting closer to the FOMC’s 2 percent objective for the personal consumption expenditure deflator . . . That said, I see little prospect of inflation climbing sharply over the next year or two. There still are considerable margins of excess capacity available in the economy—especially in the labor market—that should moderate price pressures.”

 Read more

The declines in the prices of bonds and many risk assets since the Fed’s policy announcements last week have followed a sharp rise in the market’s expected path for US short rates in 2014 and 2015. This seems to have come as surprise to some Fed officials, who thought that their decision to taper the speed of balance sheet expansion in the next 12 months, subject to certain economic conditions, would be seen as entirely separate from their thinking on the path for short rates. Events in the past week have shown that this separation between the balance sheet and short rates has not yet been accepted by the markets.

The FOMC under Chairman Bernanke has worked very hard on its forward policy guidance, so there is probably some frustration that the markets have “misunderstood” the Fed’s intentions. Richard Fisher, the President of the Dallas Fed, said that “big money does organise itself somewhat like feral hogs”, suggesting that markets were deliberately trying to “break the Fed” by creating enough market turbulence to force the FOMC to continue its asset purchases. Read more

Robin Harding

The current FOMC meeting, which starts today and concludes tomorrow without a Ben Bernanke press conference, is unlikely to produce much news. Steady movement towards a taper of the $85bn, QE3 programme of asset purchases has been checked by a run of bad economic data since March.

I get no sense that much has changed in the thinking of most FOMC officials. There is still a fair bit of confidence that the underlying state of the economy has improved (see, for example, the comments of Boston Fed president Eric Rosengren). The main effect of weak payrolls and the sequester is to increase uncertainty about the trajectory of the economy. That encourages the status quo – and open-ended QE means the default is continued purchases. Read more

Robin Harding

The minutes of the Fed’s January meeting do not suggest that QE3 is about to stop – indeed they reaffirm ongoing asset purchases – but they do make it hard to believe that buying at a pace of $85bn a month really is open-ended.

Compared with the December minutes, which had people wanting to continue QE3 until the end of 2013 or stop well before then, January reads like a deliberate attempt to be less clear about when asset purchases will end. The December discussion came from voting members, January is just participants; December referred to dates, January does not. Read more

Robin Harding

This month’s FOMC is likely to produce little visible action but there is a lot going on under the surface. The meeting starts tomorrow, Tuesday, October 23, and should conclude with a policy statement around 12.30 ET on Wednesday, the 24th.

What to expect?

Not much new. QE3 has just begun, Operation Twist 2 is ongoing, and for reasons discussed below, it is probably (although not definitely) too early for communication changes.

The FOMC may want to make slight updates to its statement noting some mildly positive economic data. It might strike a more positive tone on housing, but given that QE3 is tied to the labour market, any change to “growth in employment has been slow” is likely to be cosmetic.

Consensus forecasts

The FOMC is set to discuss consensus committee forecasts on day one. This is not as sexy as QE – it won’t move the markets – but is profoundly important to the future of the Fed. It will affect policy down the line. Read more

Claire Jones

Our week ahead email helps you to track the most important events in central banking. To see all of our emails and alerts visit

Bernanke testimony

Fed chairman Ben Bernanke faces Congress next week for the central bank’s twice-yearly Monetary Policy Report to the Senate and the House of Representatives.

Will Mr Bernanke offer any clues that the launch of QE3 is imminent? This from the FT’s US economics editor Robin Harding: Read more

Robin Harding

There’s lots to learn from the June 2012 FOMC minutes although all the attention, as you’d expect, is on parsing the chances of QE3. I’ll do a bit of that below but here are some other points of interest:

I read the minutes as showing a fairly high chance of QE3 if the economy remains weak. Some evidence for that view: Read more

Claire Jones

Our week ahead email helps you to track the most important events in central banking. To see all of our emails and alerts visit

Joint action?

Hopes for joint central bank action mounted on Friday ahead of Sunday’s Greek election. Will the central banks deliver?  Read more

Robin Harding

The most obvious problem with the Fed’s interest rate forecasts, discussed here yesterday, is their dissonance with the FOMC statement’s forecast of exceptionally low interest rates “at least through late 2014″.

The median participant (9th of 17) thinks rates should be 1 per cent at the end of 2014 and the median voter (5th or 6th of 10) must think they should be a minimum of 0.5 per cent. The statement is a committee decision and it can reasonably be different from the median individual view. It is still confusing, though, and weakens the credibility of the statement when they look so different.

The Fed is looking at a wide range of options to tweak communications further. Some would resolve the issues with this chart – for example Mr Bernanke acknowledged the idea of identifying who made each individual forecast – while others address the broader and more important question of giving information on the Fed’s reaction function.

Here, though, are a few ways to address the simple confusion caused by the voter/non-voter divide in the rate forecast chart.  Read more

Robin Harding

There’s probably nothing that would annoy Ben Bernanke more than being caught in a logical inconsistency over some aspect of monetary policy. At the Fed’s press conference today, he vigorously defended himself against Paul Krugman’s charge that the Fed’s recent actions are inconsistent with his academic views on Japan fifteen years ago.

The Fed’s interest rate forecasts, however, are getting the bank into a real bind: Read more