Quite contrary to my expectations, not to mention those of a
majority of investors and analysts, I think, Ben Bernanke's Federal
Reserve confronted the recent weak economic data and delivered
almost exactly nothing.
The Fed didn't even extend the "at least through" language.
Changing "at least through late 2014" to "at least through
mid-2015" was probably the smallest token gesture the Committee
could have made. The language, originally perceived to be a
'promise,' has become a bit of a joke since the projections by
members of the FOMC indicate that many of them don't take the
promise as representing any kind of
, merely a projection that they don't all agree with. As such, it
has zero policy value since buying 2-year notes on the basis of
what the pointy heads suggest they
will be their policy a year from now would be just plain stupid.
And yet, the Fed didn't even incline its head with a small nod in
Wall Street Journal
columnist Jon Hilsenrath must feel used.
His column last week
suggested strongly that Fed officials "find the current state of
the economy unacceptable" and that they "appear increasingly
inclined to move unless they see evidence soon that activity is
picking up on its own." Wall Street assumed that Hilsenrath wasn't
engaging in unsubstantiated guesswork about policy, but that the
suggestion was being run up the flagpole.
There is certainly no evidence yet that "activity is picking up
on its own." The ISM Manufacturing Index remained just barely on
the shady side of 50.0, when a bounce was expected; this included a
drop in the "Employment" subindex to the lowest level since the end
of 2009 (see Chart below, source Bloomberg). The data will keep on
coming, of course, but so far there haven't been any signs of
imminent dawn. Indeed, the Fed continues to see "significant
downside risks" in the global economy.
(click to enlarge)
I admit that I thought they would do something
than merely change the non-binding promise language, and I was
surprised they did not. I thought they would cut the Interest on
Excess Reserves ((IOER)) rate back to zero. That doesn't mean,
however, that I thought cutting IOER is the
thing to do. Monetary policy here is impotent with respect to
growth, and while they can push inflation higher or lower with
policy the move they
make is probably to start pulling back on liquidity once Europe is
clear of danger. They should not wait until money velocity begins
to rise again.
But that isn't what they
do. The Fed doesn't
that it is impotent with respect to the Unemployment Rate, so even
though they are firing blanks at a charging enemy with no apparent
effect, I fully expect them to keep on firing. It's odd, as an
analyst, to try and get into the "Fed's brain" and think
intentionally wrong, but I suppose it's what actors and actresses
do when they're getting into character. It's just that my liberal
arts education didn't include a thespian turn.
If I am in character as the Fed chairman, I'd be thinking it's
awfully dangerous to wait before firing my nextblank bullet.
Gasoline prices are back on the rise, with retail unleaded back
above $3.50 (see Chart, source Bloomberg), joining agricultural
produce. This means headline inflation, which currently appears
tame, is unlikely to stay that way for very long. If the Fed wants
to ease policy in late September, they may have to do it with
less-accommodating price data.
(click to enlarge)
It is possible that the Chairman is afraid to do anything
unusual, like cutting IOER, unless he has a presser scheduled so
that he can explain it to us poor benighted folk? This could be the
case, but it doesn't explain why they didn't do
Could it be that, with the ECB meeting Thursday and that body
very likely to ease more aggressively than the Fed anyway, that the
Fed chief wanted to let Draghi 'hold serve'? This seems strange,
but it's plausible.
In any event, investors seem to believe there is another
monetary policy shoe to drop. While yields backed up slightly with
10-year yields +5bps (1.52%) and stocks dropped a trifle (S&P
-0.3%), commodities actually rallied after the Fed announcement.
Almost certainly, the market will get something from the ECB
Thursday, but I suspect stocks and bonds are clinging too
desperately to that eventuality and I expect any rally on the news
will be short-lived.
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