Esther the Bold

Notes from the Fed Announcement 7/31/2013:

Good for Esther L. George! She’s standing up for what she believes in, as the sole dissenter on the FOMC. It’s not easy to be the sole voice for any cause, and much less so when the whole world is listening. Oh, and she’s telling the most powerful man on earth that he’s not only wrong, but risking the future of our economic and financial balance. The truth is that no one knows how this is going to go, and it could very well be that long term inflation really is affected by the massive amounts of cash being injected into the market.

As a trader, I would love to see higher interest rates. As a wannabe economist, the numbers show that we don’t have an inflation problem, stocks have been going up, the housing market is recovering, and the jobs market is recovering. As a realist, we’re pushing beyond the limits of what has been done before. It’s like Bernanke is the first astronaut, but he’s not nervous. Shouldn’t we be a little less comfortable in this situation?

You can find the Federal Reserve July 31st Statement here.

Information received since the Federal Open Market Committee met in June suggests that economic activity expanded at a modest pace during the first half of the year. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen somewhat and fiscal policy is restraining economic growth. Partly reflecting transitory influences, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.

The key part of the first paragraph is “inflation has been running below the Committee’s longer-run objective.” This is the first clue that tapering of the $85B may be held off a little bit longer. As I often say, the fed is much more worried about deflation than it is about inflation. Projections on inflation have been much more on target by the doves than the hawks, and a big reason Janet Yellen is currently the heavy favorite to take Bernanke’s post at the end of this year. She’s one of the most dovish, and most similar to Bernanke, giving the most consistency to markets, fewer surprises, and a successor that will see Bernanke’s larger plan through to fruition. That’s the plan anyway.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.

Here is clue number two that the fed will delay the taper: “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.”

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

They really want the housing market to recover.

The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

Increase or Reduce. I think it’s interesting that they leave the option of increasing QE in the statement. Would they really increase QE? This is another sign that they are terrified of deflation.

I also like that they recognize the cost compared to the progress should be calculated and considered. “The Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.”

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

They won’t raise rates until well after QE is at zero. They kept the target at 6-1/2% unemployment.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

Justin Bouchard

Jul 31, 2013

– See more at: https://www.algofast.com/2013/07/esther-the-bold-notes-from-the-fed-announcement-7-31-2013#sthash

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