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Fed Brief


May 22 2012 - Hawkish Forecasts, Dovish Bernanke Comments Leave Markets at Square One Following Busy Fed Day

Forecasts Suggest No QE, But Fed Chairman Keeps Verbal Threat on the Table

A busy day for the Fed as they provided their updated statement as well as a fresh look at projections on interest rates, GDP, inflation and Unemployment. Then Fed Chairman Ben Bernanke provided commentary in a press conference and took questions from the press to discuss the update to the Fed's comments and outlook.

In general the statement and the forecasts suggested that there would be no further need for QE as the members upgraded their outlook to the economy and unemployment while noting inflationary pressures had increased but would remain transitory. But the Fed did not close the door on QE as Mr. Bernanke pointedly noted that any decisions would be based on data received in the coming months. Another interesting aspect was the commentary on Europe which shows that the threat from the troubled region could provide the Fed with a reason to take further actions.

In general the directives, commentary, and forecasts were in line with market expectations. And, given no action took place, it had little impact on the markets. The attention will slowly turn to the June meeting which will once again garner the markets attention. This will mark the final meeting before 'Operation Twist' comes to an end. So like it or not, the Fed will need to make some decisions that could change the direction of monetary policy.  

Highlights from Fed Chairman Ben Bernanke Conference Call

-- Asked if he is being too cautious: Mr. Bernanke said the committee has been 'bold and aggressive' to date and that it is prepared to do more of what is needed to keep on target. He noted that they will continue to access risk and will look at unemployment progress and inflation remaining 'close to target'. He emphasized that they were 'entirely prepared to take additional actions'.

-- Mr. Bernanke was asked about his views now vs 15 years ago when he criticized the Bank of Japan for inactivity: He stated that the views expressed fifteen years ago on Bank of Japan have been consistent. Mr. Bernanke said at that time he said a central bank should avoid deflation and that once a rate hits zero there are still tools available for accommodation. He noted that right now we are not in deflation so have no needed tools to offset this. Noted the Fed has continued to use extraordinary tools. The key difference between now and Japan is that Japan was in deflation and demanded additional actions.

-- Asked about Sheila Bair bond bubble article: He said it is premature to declare victory as Ms. Bair suggested; says keeping rate low remains a priority. He also noted rates also lower due to lack of inflation and safe haven status.

-- Asked about the impact of mild winter on jobs?: He said it reflects the difficulty in forecasting these figures. Mr. Bernanke noted he is not drawing too much of a conclusion from the March report. He said we could see nonfarm payroll sliding back below the 250K area. Noted that, if there appears to be a relapse in Unemployment, then that could drive the Fed to take action.

-- Says in January markets were calmer thanks in large part to steps taken by the ECB. He noted we saw market stress in recent weeks and thus volatility over here. The Fed is taking note that 'a portion' of the improvement has been reversed. Noted he met with European colleagues over the weekend at the IMF meetings; says true Europeans have made substantial progress; expect them to continue to follow through commitments but does see significant problems still remains.

Notable Differences in FOMC  

 -- April 25: Despite some signs of improvement, the housing sector remains depressed... March 13: The housing sector remains depressed...

-- April 25: Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline... March 13: Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately....

-- April 25: The Committee expects economic growth to remain moderate over coming quarters and then to pick up gradually... Mar 13: The Committee expects moderate economic growth over coming quarters...

-- April 25: Strains in global financial markets continue to pose significant downside risks to the economic outlook... Mar 13: Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook.

Changes to Monetary Policy Outlook

The Fed provides an outlook on the expectations of rates for 2012, 2013, 2014 and the Long Run. In it, the Fed provides a dot representing the rate each member expects in a given year. We took the cumulative and divided by the 17 members in order to create a 'cumulative average'. The would provide a general overall collective in terms of policy rate expectations.

The average rate expectations at year end as of today: FY12: 0.37%; FY13: 0.60%; FY14: 1.32%; Longer run: ~4.2%  The average rate expectations at year end from the January meeting: FY12: 0.35%; FY13: 0.56%, FY14: 1.12%; Longer run: ~4.2%

 

Fed Economic Projections (central tendencies as of  April 2012)
  2012 2013 2014 2015 Long Run
Change in real GDP 2.4 to 2.9 2.7 to 3.1 3.1 to 3.6 N/A 2.3 to 2.6
Jan projection 2.2 to 2.7 2.8 to 3.2 3.3 to 4.0  N/A 2.3 to 2.6
Unemployment rate 7.8 to 8.0 7.3 to 7.7 6.7 to 7.4 N/A  5.2 to 6.0
Jan projection 8.2 to 8.5 7.4 to 8.1 6.7 to 7.6  N/A 5.2 to 6.0
PCE inflation 1.9 to 2.0 1.6 to 2.0 1.7 to 2.0  N/A 2.0
Jan projection 1.4 to 1.8 1.4 to 2.0 1.6 to 2.0  N/A 2.0
Core PCE inflation 1.8 to 2.0 1.7 to 2.0 1.8 to 2.0 N/A
Jan projection 1.5 to 1.8 1.5 to 2.0 1.6 to 2.0 N/A

 

 

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