When the Fed began its third round of quantitative easing last autumn, the most recent jobs report in hand was for August, which showed an unemployment rate of 8.1 per cent. Today the unemployment rate is 7.6 per cent. The Fed said it would keep buying assets, currently at a pace of $85bn-a-month, until there is a “substantial improvement” in the “outlook for the labour market”. The question is whether the current data meet that condition or at least bring it close enough that the Fed can start to taper its purchases.
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
Today’s speech by Janet Yellen is a mirror of Ben Bernanke last week when it comes to the costs and risks of continued asset purchases. “At this stage, I do not see any [risks] that would cause me to advocate a curtailment of our purchase program,” she says.
Where Ms Yellen, the Fed vice chair, breaks some new ground is on the definition of a “substantial improvement” in the labour market.
A reminder: the Fed says it will keep on buying assets, currently at a pace of $85bn a month, until it gets that substantial improvement. Ms Yellen sets out five measures which basically form a Fed dashboard for the labour market. Here they are: Read more
All markets want from Ben Bernanke when he testifies before Congress on Tuesday and Wednesday is reassurance that he is not getting cold feet about the Fed’s open-ended, $85bn-a-month, QE3 programme of asset purchases. That follows minutes which, while notably vague, showed “many” participants worrying about QE3′s costs and risks.
They are likely to get that reassurance — although maybe not in the most straightforward manner. It is important to note that, when Mr Bernanke testifies, he is speaking for the committee and not for himself. This is the statutory language: Read more
The paper at this year’s US Monetary Policy Forum – where market economists get to present to central bankers – is called “Crunch Time: Fiscal Crisis and the Role of Monetary Policy“. It shows a new wrinkle on US fiscal problems: if there is any kind of debt sustainability crisis it could make the Fed’s exit from easy monetary policy a whole lot more painful.
This is the money chart. Black is the baseline for Fed profit and loss in the coming years. Red is what happens if a fiscal crunch pushes up long-term bond yields (and hence causes losses for the Fed on its portfolio). Read more
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
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.
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
The FOMC meeting now under way – concluding with a statement at lunchtime tomorrow, Thursday September 13, followed by a Ben Bernanke press conference – could well produce the most important Fed move since the 2008-09 crisis. Here is what I expect.
Will the Fed launch QE3?
There is an excellent chance that the Fed will both extend its forecast of low interest rates into 2015 and launch a new round of asset purchases.
Fed communications point emphatically in that direction. Read more
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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
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
The March FOMC minutes mark a step back from further Fed easing along multiple dimensions. The signal is pretty clear and becomes even more so once you think behind the words. In January:
“A few members observed that, in their judgment, current and prospective economic conditions – including elevated unemployment and inflation at or below the Committee’s objective – could warrant the initiation of additional securities purchases before long. Other members indicated that such policy action could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.”
I have a piece in today’s paper previewing what promises to be a quiet Federal Open Market Committee meeting this month.
In particular, talk that the FOMC is now studying a programme of “sterilised” quantitative easing is, in my view, incorrect. I think the current FOMC discussion looks more like this: Read more