Preview of the Fed’s Next Meeting

The stock market opened up a little bit higher today but is now down a little bit. Looking across the sectors in the U.S. market, frankly, there doesn’t appear to be much movement at all. But the Japanese Nikkei had a very impressive move today as it jumped nearly 5%. Of course, the volatility there has been very high.

The Federal Reserve meets again next week, and this looks to be an important meeting. The central bank will be discussing the beginning of the end of its bond buying program. Up till now, I’ve been in the camp saying the Fed won’t make any moves before the end of the year. I’m less sure of that today.

On Friday, Jon Hilsenrath of the Wall Street Journal, who is widely understood to be Bernanke’s go-to media conduit, wrote:

Federal Reserve officials are likely to signal at their June policy meeting that they’re on track to begin pulling back their $85-billion-a-month bond-buying program later this year, as long as the economy doesn’t disappoint.

I’m going to assume that’s Bernanke speaking. Note that he didn’t say they “will pull back,” but “they’re on track to begin pulling back.” Of course, I can say that I’m “on track” for a lot of things. It doesn’t mean that’s about to happen. Still, the Fed wouldn’t be floating this in the media if they didn’t think it was important. This is a big deal.

We also have to remember that the Federal Open Market Committee is just that—a committee. Bernanke is the head of it but a majority can oppose him. It’s happened before.

We’ve come to an interesting point in the market where the economic events that are normally the big boys, like the jobs report or a Fed statement, are no longer top dog. Instead, the releasing of the Fed’s minutes is perhaps the most important event. The Fed releases the minutes of each meeting three weeks after they’re held. That means the all-important minutes from this meeting will be out around July 10th. Everyone will want to know what is said. I should add that the Fed’s minutes are a study in indefinite pronouns. Many said this. A few said that. Some added that. It’s almost like it’s written in code.

Also, the minutes release will be probably be just ahead of Bernanke’s Humphrey Hawkins testimony before Congress. He does that twice a year, once in the dead of winter and again in the middle of summer. This is where he spells out the details of monetary policy.

The key driver of what the Fed will do is the Fed’s own forecast of what will happen. Hilsenrath notes that the Fed has been consistently over-optimistic in what I’ll generously call “the recovery.” The problem is that fiscal policy has been holding back the economy. At least, that’s Bernanke’s view. The Fed believes that the economy will ramp up later this year. The stock market believes earnings will, too. There’s a lot riding on this second-half recovery. If it indeed comes, a lot of problems will be taken care of.

Hilsenrath had another article on Friday saying that the Fed really doesn’t like Wall Street’s latest buzzword: tapering.

The hangup for Fed officials is the word “tapering” suggests a slow, steady and predictable reduction from the current level of $85 billion a month at a succession of Fed meetings, say to $65 billion per month, then to $45 billion and so on. And that’s not necessarily what Fed officials envision.

Because Fed officials are uncertain about the economic outlook and the pros and cons of their own program, they might reduce their bond purchases once and then do nothing for a while. Or they might cut their bond buying once and then later increase it if the economy falters. Or they might indeed reduce their purchases in a series of steps if warranted by economic developments — but they don’t want the markets to think that’s a set plan. It is, as Fed officials like to say, “data dependent.”

This strikes me as a bit pedantic. With interest rates, Fed policy almost always follows a trend. It stands to reason that bond buying will be similar. I think it would be a mistake for the Fed to start tapering (or whatever you call it) before the end of the year. Inflation is hardly a threat and the jobs market is sluggish at best. Unfortunately, I don’t think they’ll take this advice.

Posted by on June 10th, 2013 at 10:13 am

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