Dec 9 2013 - Fed Remains Data Dependent But Mentions of Tapering Send Markets LowerFed Upbeat About Data Trends; Evaluates QE
The minutes from the October FOMC meeting were left open for interpretation primarily because they conveyed a sense that Fed officials also think things remain wide open for interpretation. In brief, there is a hope among participants that things will get better, but ultimately they know they are forced to wait things out like the rest of us to see if their hope becomes reality. The October CPI report released this morning certainly didn't match the Fed's hoped-for reality as the 1.0% increase over the last 12 months was the smallest increase since October 2009, making it clear the Fed is still falling short on the inflation side of its dual mandate.
The initial reaction to the minutes was typically volatile. However, for a market that has risen nearly 9.0% over the last three months, it is not surprising that it would seek out some hawkish-sounding views in the minutes as an excuse to take some money off the table.
In that regard, it found a juicy nugget in the following statement:
"During this general discussion of policy strategy and tactics, participants reviewed issues specific to the Committee's asset purchase program. They generally expected that the data would prove consistent with the Committee's outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months."
We suppose that statement just raised the importance of the November employment report (out on December 6) a further notch. Of course, one has to wonder if the NY Post story yesterday about the employment data having been fudged so to speak ahead of the 2012 election might give the Fed some pause and prompt some added patience before jumping to tapering conclusions based on the next employment report.
Either way, it is becoming increasingly apparent in recent statements from Fed officials (and not even including the minutes seen today) that it is trying to manage the communication that a tapering of its asset purchase program isn't a tightening (we'll ignore for now that it is called Quantitative Easing) and that the market can count on the fed funds rate being left near the zero bound for a long time even after the asset purchases end.
We found it interesting that there was also some discussion of winding down the program before an unambiguous further improvement in the outlook was apparent. That speaks to concerns among some participants about the costs of the program exceeding the benefits. Of course, it is worth noting that Janet Yellen (soon to be confirmed as the next Fed chairman) doesn't see things that way.
In any event, these minutes were neither extremely hawkish nor extremely dovish. What they were was uncertain, which is why they proved to be catalytic for some profit-taking activity. Key Excerpts from Minutes
-- In general, the data available at the time of the October 29-30 meeting suggested that economic activity continued to rise at a moderate pace
; the set of information reviewed for this meeting, however, was reduced somewhat by delays in selected statistical releases associated with the partial shutdown of the federal government earlier in the month.
-- Foreign economic growth appeared to improve
in the third quarter following a sluggish first half, largely reflecting stronger growth estimated for China and a rebound in Mexico from contraction in the previous quarter.
-- Financial market views about the outlook for monetary policy shifted notably following the September FOMC meeting, as the outcome and communications from that meeting were seen as more accommodative than expected.
-- In the economic projection prepared by the staff for the October FOMC meeting, the forecast for growth in real gross domestic product (GDP) in the near term was revised down somewhat from the one prepared for the previous meeting, primarily reflecting the effects of the federal government shutdown
and some data on consumer spending that were softer than anticipated.
-- Although the incoming data suggested that growth in the second half of 2013 might prove somewhat weaker than many of them had previously anticipated, participants broadly continued to project the pace of economic activity to pick up
-- While downside risks to the outlook for the economy and the labor market were generally viewed as having diminished
, on balance, since last fall, several significant risks remained, including the uncertain effects of ongoing fiscal drag and of the continuing fiscal debate.
-- Participants generally saw the direct economic effects of the partial shutdown of the federal government as temporary and limited
, but a number of them expressed concern about the possible economic effects of repeated fiscal impasses on business and consumer confidence.
-- Although a number of participants indicated that the September employment report was somewhat disappointing, they judged that the labor market continued to improve
, albeit slowly.
-- The drop in the unemployment rate over the past year, while welcome and significant, could overstate the degree of improvement in labor market conditions
, in part because of the decline in the labor force participation rate. However, a few participants offered reasons why recent readings on the unemployment rate might provide an accurate assessment, on balance, of the extent of improvement in the labor market.
-- During this general discussion of policy strategy and tactics, participants reviewed issues specific to the Committee's asset purchase program. They generally expected that the data would prove consistent with the Committee's outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months
. However, participants also considered scenarios under which it might, at some stage, be appropriate to begin to wind down the program before an unambiguous further improvement in the outlook was apparent.
-- For example, most participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves
could be worth considering at some stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions.
-- Inflation was running below the Committee's longer-run objective, but longer-term inflation expectations were stable, and the Committee anticipated that inflation would move back toward its objective over the medium term. Members recognized, however, that inflation persistently below the Committee's 2 percent objective could pose risks to economic performance.
-- Many members stressed the data-dependent nature of the current asset purchase program
, and some pointed out that, if economic conditions warranted, the Committee could decide to slow the pace of purchases at one of its next few meetings. A couple of members also commented that it would be important to continue laying the groundwork for such a reduction in pace through public statements and speeches, while emphasizing that the overall stance of monetary policy would remain highly accommodative as needed to meet the Committee's objectives.Economic Projections from September Meeting
|Fed Economic Projections (central tendencies as of September 2013)|
|Change in real GDP
||2.0 to 2.3
||2.9 to 3.1
||2.9 to 3.6
||3.0 to 3.5
||2.2 to 2.5|
||2.3 to 2.6
||3.0 to 3.5
||2.9 to 3.6
||2.3 to 2.5|
||7.1 to 7.3
||6.4 to 6.8
||5.9 to 6.2
||5.4 to 5.9
||5.2 to 5.8|
||7.2 to 7.3
||6.5 to 6.8
||5.8 to 6.2
||5.2 to 6.0|
||1.1 to 1.2
||1.3 to 1.8
||1.6 to 2.0
||1.7 to 2.0
||0.8 to 1.2
||1.4 to 2.0
||1.6 to 2.0
|Core PCE inflation
||1.2 to 1.3
||1.5 to 1.7
||1.7 to 2.0
|| 1.9 to 2.0
||1.2 to 1.3
||1.5 to 1.8
||1.7 to 2.0