An Eagerly Awaited FOMC Message

June 19, 2013

The FOMC statement will be released in less than two hours, along with new forecasts.  The previous statement on May 1 caught the market’s attention with the addition of a sentence saying, “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation at the outlook for the labor market or inflation changes.”  In other respects, the May statement was nearly identical to the prior one from March, as speculation has grown subsequently that the amount of quantitative easing was kindled further by better employment growth.  The current third round of QE was unveiled at the meeting last September 13.  Non-farm payroll employment, which rose 130K per month over the six months to September, advanced 49% to a better pace of 194K per month in the six months to May 2013, and the current 7.6% jobless rate is a half-percentage point less than the 8.1% last August, which was the latest information known to officials when QE3 was launched.  The latest 12-month rise in the personal consumption deflator is only 0.7%, however, and the core PCE deflator’s gain of 1.1% is also far lower than the Fed’s target.

Bernanke has an exceedingly difficult assignment if in fact a majority at the FOMC are converging on a plan to taper off the volume of its quantitative easing.  Verbally communicated efforts to convey that such a move doesn’t affect the consensus not to boost short-term interest rates before well into 2015, and the U.S. yield curve has steepened very sharply.  The 10-year Treasury note is at 2.21%, 59 basis points higher than when officials met seven weeks ago and 47 bps greater than the average yield at the time of all the FOMC meetings during the past year.  Not since August 2011 has the FOMC met with the 10-year yield higher than now.  U.S. real GDP rose only 1.8% during the year to 1Q13, only three-quarters as much as in the previous year.  Outside of Japan’s experience trying to exit a number of times from quantitative easing during the past decade and a half, there’s little precedent for how the U.S. economy might respond.  The lesson from Japan’s experience is that it’s very hard for an economy to wean itself off ultra-easy monetary policy.  It’s worth noting, too, that when the Fed raised the fed funds target from 3% to 6% during the year to late January 1995, the 10-year Treasury rate soared from 5.77% to 8.03% by early November 1994, and U.S. real GDP growth slowed from 4.8% annualized in the first half of 1994 to just 0.9% in the first half of 1995.

That slowdown in the mid-1990s wasn’t such a bad thing since headline and core inflation then were hovering around 3%, much greater than now.  A similar body blow to the U.S. real economy at the current stage could transform disinflation into deflation.  Like I said, Bernanke needs to be careful, and his success will be known pretty quickly by how Treasury yields react.  He doesn’t want them to rise higher or, God forbid, above 2.25% on the 10-year which is a huge psychological barrier than could such in considerably more technical selling.  But one can’t always get what you want.

  EUR/$ $/JPY 10Y, % DJIA Oil, $
06/30/04 1.2173 109.44 4.63 10396 37.95
06/30/05 1.2090 110.89 3.96 10370 57.00
06/29/06 1.2527 116.07 5.20 11077 73.41
06/28/07 1.3452 123.17 5.10 13456 69.82
08/07/07 1.3749 118.55 4.73 13510 72.27
09/18/07 1.3888 115.75 4.51 13475 81.42
10/31/07 1.4458 115.28 4.42 13873 93.59
12/11/07 1.4682 111.49 4.11 13645 89.78
01/30/08 1.4792 107.31 3.70 12454 91.70
03/18/08 1.5786 98.73 3.41 12257 107.53
04/30/08 1.5562 104.58 3.83 12953 111.54
06/25/08 1.5568 108.37 4.18 11837 133.62
08/05/08 1.5445 108.42 3.97 11484 119.82
09/16/08 1.4144 105.16 3.36 10936 91.18
10/08/08 1.3625 99.87 3.50 9447 87.02
10/29/08 1.2933 97.15 3.81 9145 67.38
12/16/08 1.3790 90.14 2.52 8687 44.14
01/28/09 1.3253 90.01 2.61 8356 42.92
03/18/09 1.3115 98.13 2.94 7340 47.73
04/29/09 1.3331 97.06 3.02 8194 51.05
06/24/09 1.3984 95.43 3.59 8373 68.76
08/12/09 1.4221 96.17 3.71 9366 70.64
09/23/09 1.4779 91.50 3.50 9859 69.13
11/04/09 1.4884 90.75 3.51 9896 80.66
12/16/09 1.4542 89.78 3.56 10478 73.14
01/27/10 1.4045 89.49 3.61 10148 73.31
03/16/10 1.3756 90.64 3.67 10645 81.45
04/28/10 1.3157 94.10 3.75 11043 82.57
06/23/10 1.2284 90.12 3.13 10307 76.50
08/10/10 1.3107 85.85 2.81 10605 79.94
09/21/10 1.3132 85.21 2.66 10747 73.05
11/03/10 1.4059 81.35 2.53 11174 84.59
12/14/10 1.3423 83.37 3.38 11497 88.47
01/26/11 1.3658 82.55 3.41 12001 87.36
03/15/11 1.3969 81.04 3.29 11815 98.09
04/27/11 1.4665 82.63 3.36 12612 112.48
06/22/11 1.4392 80.12 2.97 12175 94.87
08/09/11 1.4234 77.09 2.36 10993 81.76
09/21/11 1.3778 76.34 1.93 11377 86.74
11/02/11 1.3724 78.11 2.03 11805 92.77
12/13/11 1.3067 77.92 1.98 12130 100.20
01/25/12 1.3027 77.96 1.97 12670 98.85
03/13/12 1.3096 82.76 2.08 13044 106.34
04/25/12 1.3226 81.37 1.97 13096 104.13
06/20/12 1.2693 79.28 1.66 12837 83.63
08/01/12 1.2300 78.10 1.49 13028 88.98
09/13/12 1.2895 77.43 1.72 13342 97.60
10/24/12 1.2948 79.75 1.77 13115 85.72
12/12/12 1.3082 83.24 1.70 13325 87.13
01/30/13 1.3584 91.16 2.02 13949 97.63
03/20/13 1.2948 95.65 1.94 14497 92.82
05/01/13 1.3195 97.48 1.62 14740 90.47
06/19/13 1.3404 95.23 2.21 15290 98.25

C0pyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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