Fed Policy Event at Intermission

April 27, 2011

Today’s FOMC statement was released at 12:30 EDT (16:30 GMT) as promised, and market participants now must wait an hour and 45 minutes for Chairman Bernanke’s press conference to begin.  That’s an hour longer than the interval observed between the point of announcement by the ECB of whether rates have been changed and the start of its press briefing.  Moreover, the ECB doesn’t release a statement of its latest thinking until the start of its conference.

There’s a third functional difference in how the world’s two most influential central banks handle their press conferences, which concerns the statement itself.  The ECB releases a lengthier document than the Fed without any indication of the votes by its individual members but with more variability than the Fed in the text, but still not a lot, from meeting to meeting.  As investors assess the Act I of the Fed’s event, there’s not much there to elicit a reaction.

Change is pretty much limited to the first paragraph.  This is what the FOMC has said.

  • The assessment of activity is essentially the same given in mid-March.  Then the recovery was described to be on a firmer footing and now it “is proceeding at a moderate pace.”  Assessments of the labor market, consumption, business investment, construction haven’t been changed.  Exports aren’t mentioned, although it might have been pointed out that such have lost some momentum.
  • The point is repeated that commodity prices are significantly higher now than last summer, and note is made that oil prices have risen further since the March meeting.  However, Fed officials still believe that this elevation will be transitory.  The ECB, by comparison, considers the change more permanent and, more importantly, worthy of a policy reaction now whether it’s temporary or not.
  • QE2 will be carried through to term in June.  This is the first acknowledgment of that intention but not very newsworthy.  The $600 billion of planned Treasury purchases have mostly occurred already and will be so by the next FOMC meeting.
  • Quantitative easing beyond this stage remains vague.  Nothing has been pre-announced, and identical language has been kept, noting that the Committee “is prepared to adjust those holdings of Treasury securities as need to best foster maximum employment and price stability.”
  • A bias of extreme policy accommodation will continue, as the statement repeats verbatim the assertions that “the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate.”
  • The conditional promise to retain a 0-0.25% fed funds target “for an extended period” has been again expressed in identical language as before.
  • The vote, as in March, was unanimous 10-0.  However, minutes from the March meeting released on April 5 revealed signs of greater division between Committee doves and hawks.  Plosser, Kocherlakota, Lacker and Fisher were then willing to consider giving QE2 a haircut.  So the terse tally of votes in today’s statement provides a sense of complete cohesiveness out of design, not because that view is representative of the underlying dynamics of the discussion.

The Q&A of a 45-minute press conference vests tremendous discretion in the hands of the Fed Chairman to add or take away the sanitized details of the statement.  Every person placed in such a role is likely to treat it differently no matter how well instructed in advance.  Because this is the inaugural Fed press conference in this format, it will carry high drama.

Above all, Bernanke will try to achieve whatever market reaction the Fed desires.  He will have the benefit of knowing the response to the statement alone.  50 minutes after such was posted, U.S. equities had risen by 0.2-0.3%, and the dollar showed a drop of 0.3% against the yen and euro.  The 10-year Treasury yield was off a basis points at 3.35%, and gold had climbed 0.4% and further above the key $1500 per ounce level.  If those movements sit well with policymakers, Bernanke will steer close to what is contained in the written statement.  If officials are dissatisfied, the Chairman will be more inclined to put a different slant on the market’s interpretation.  He’ll have to handle the exercise with great discipline and care.  Markets form first impressions, and if he makes a gaffe, such could haunt his ability as an effective communicator at future press conferences.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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