The Wall Street Journal – Jon Hilsenrath: A Forecast of What the Fed Will Do: Stand Pat
It’s possible to handicap the Fed’s changing forecast in part because officials are becoming open about it. And the outlook doesn’t look like it’s shifting in a way that would support new initiatives to boost economic growth. The new forecasts could project a little more inflation in 2012 than the Fed forecast in January, thanks in part to a recent rise in gasoline prices. It could also project a little less unemployment for 2012, thanks to recent declines in the jobless rate. But the overall growth outlook for 2012 doesn’t seem to have changed much from a few months ago. The economy looked at times in the first quarter as though it was gaining momentum, but it finished with a whimper which will likely reinforce Fed officials’ worries about the recovery’s durability. That should also mean their projections for 2013 and 2014 won’t change much until they get more evidence about how the recovery is evolving. Against the backdrop of a little more inflation and a little less unemployment than expected in the short-run, a scattering of officials might say that short-term interest rates should go up sooner than they projected in January to forestall a run-up in consumer prices. Narayana Kocherlakota, the Minneapolis Fed president, said recently the Fed would need to raise rates in 2013, or possibly sooner, by late 2012. But with many officials still doubtful about the durability of the recovery and expecting inflation to recede, the broader view at the Fed seems likely to favor sticking to their plan to keep rates low until late 2014.
Hilsenrath is the “Federal Reserve’s mouthpiece.” The market is reading the story above as a draft of the FOMC statement. We are too.
That said, one point of difference we have is the role of financial markets in the Federal Reserve’s decision making process. If financial markets sell-off hard enough, that alone could spur the need for QE3.
The Financial Times – Economic outlook: QE outcomes awaited
There are two monetary policy meetings at major central banks this week, the Federal Reserve and the Bank of Japan, both of which have the potential to move the markets. Ben Bernanke follows the Fed’s likely decision to hold rates at between 0-0.25 per cent with a press conference on Wednesday at which he is expected to reiterate recent concerns about the cooling off of the US recovery in the last few weeks. The Federal Open Market Committee also presents its latest Summary of Economic Projections following the rate decision.
Barron’s – RANDALL W. FORSYTH: “Where’s the Fire, Ben?”
It’s almost certain that the Fed’s policy-setting panel will take no new initiatives and is likely to repeat yet again that it will “maintain a highly accommodative stance for monetary policy,” which translates to continuing through late 2014 its “exceptionally low” 0%-0.25% federal-funds target rate, which has been in place since late 2008. But it is equally unlikely that the FOMC will announce any new, extraordinary measures, such as additional rounds of quantitative easing or maturity-extension schemes, to attempt to bend down the long end of the yield curve. SO, WHY SHOULD ANYBODY CARE about this confab? Well, no new policy initiatives came out of the March FOMC meeting, while there were only subtle changes in the panel’s assessment of the economy and financial conditions. Nonetheless, the Treasury market’s inference that a third round of QE wasn’t in prospect, and that the Fed might begin nudging up the fed-funds rate somewhat sooner than late 2014, sent yields up about 35-to-40 basis points (0.35-to-0.40 of a percentage point).
Barron’s Online – Up and Down Wall Street Daily: A New Round of Monetary Easing Ahead?
Is the world on the cusp of a new round of monetary easing? Not yet, but if the global economies, debt crises or risk markets deteriorate, investors are expecting central banks to pump up their liquidity provisions, again. Two of the BRIC nations — India and Brazil — cut official interest rates more than expected while China is expected to lower required reserve ratios for banks, which frees up liquidity. Meanwhile, the last member of the quartet, Russia, also could ease policy down the road if its economy cools. Elsewhere, Australia could resume lowering rates next month. And Japan has pledged to keep the monetary pedal to the metal in order to weaken the yen and bolster trade. All of which reflect signs of slowing in global trade, which affects these largely export-dependent economies. The real focus will be on the two most important central banks, the European Central Bank and the Federal Reserve. While the official line at the ECB and the Fed is that no further stimulus is in prospect beyond what’s already been provided, markets are looking for clues for that to change.
In the era of historically large central bank interventions, the economy must now deal with “Bad Goldilocks,” a condition in which the recovery is too little to make a pronounced impact but remains just strong enough to keep the Federal Reserve on the sidelines. And since the onset of the financial crisis, any sign that the Fed may back off from quantitative easing stimulus has been poison for the markets, which have been struggling as of late. “We see risks of a ‘bad Goldilocks’ backdrop to financial markets in which the economy is neither ‘cold’ enough to provoke the quantitative easing that risk assets are now so cravenly dependent upon, nor ‘hot’ enough to provoke losses in bonds that would inspire a wholesale rotation out of fixed income into equities and commodities,” Michael Hartnett, chief global equity strategist at Bank of America Merrill Lynch, wrote in a recent note to clients.
The New York Times – Aiming for Clarity, Fed Still Falls Short in Some Eyes
The Federal Reserve chairman, Ben S. Bernanke, has tried to speak more clearly and more frequently than his predecessors. He has lectured college students, met with members of the military and, since last April, held quarterly news conferences. But as Mr. Bernanke prepares to meet the press for the fifth time Wednesday afternoon, after a scheduled meeting of the Fed’s policy-making committee on Tuesday and Wednesday, there are reasons to doubt that the efforts are increasing public understanding of monetary policy. Experts and investors have continued to disagree about the plain meaning of the Fed’s recent policy statements. Some say the increased volume of communication is creating cacophony rather than clarity. Political criticism of the Fed has continued unabated. And the economists and analysts who are paid to predict and translate the Fed’s actions and pronouncements for investors say that demand for their services has only increased.
Source: Bianco Research