FOMC Preview

January 29, 2014

Chairman Bernanke’s eight-year tumultuous stewardship is down to its final detail and appears likely to go out like a lamb, not a lion, without so much as the fanfare of press conference.  There is a new array of voting regional presidents on the Federal Open Market Committee, including the hawkish Dallas Fed President Fisher and the nouveau dovish Minneapolis Fed President Kocherlakota, so one are of interest will be to see who, if anybody, dissents from the majority action.  I expect that action to be another $10 billion tapering of QE3 stimulus to $65 per month. 

There is some risk that the committee instead defers from reducing quantitative stimulus again at this time, but that seems less than a 50:50 bet for the following four reasons.

  1. At the handover of chairmanship, it’s better not to spring a surprise on the market.
  2. Expectations of above-potential U.S. GDP growth in 2014 remain widespread.  Data at worst have been mixed and clearly distorted by the winter of the century.
  3. Market vital signs, shown in the table below, have not changed drastically.  Since the prior meeting on December 18 when tapering began, the dollar has risen 0.3% against the euro and fallen 1.4% versus the yen.  The 10-year Treasury yield is down 18 basis points.  The DJIA, which was way overdue for a downward correction, has dropped 2.1% on net.  Gold has firmed 2.3%, while West Texas Intermediate crude oil has slipped by 1.2%.  None of these changes is remarkable or grounds to give pause.
  4. Rather than prolonging the controversial QE3 program, which even supporters think is approaching diminishing returns on any cost/benefit scale, the better way to proceed with pro-growth and anti-deflation support is too rejigger forward guidance in such a way as to persuade doubters that the Fed Funds rate isn’t going higher before 2015, if then.

The big problem with tapering involves the collateral damage such is inflicting upon emerging markets and the risk of feedback loops from that development that could hurt the U.S. economy.  In the event that further tapering is delayed or reduced in size to an incremental movement of $5 billion, I believe this factor will be the reason although Fed officials will be reluctant to say as much.  There is a long tradition at the Fed of intentionally downplaying foreign economic trends or the dollar as reasons for changing domestic monetary policy.

The last area of interest in today’s FOMC meeting concerns the characterization of U.S. growth and price conditions and prospects.  The current view is a moderately paced continuing recovery with some labor market improvement, sub-trend inflation, still-stable longer-term inflation expectations, and an in-house view that inflation will move tack toward its 2-2.5% objective over the medium term, which is being monitored very closely to ensure that the forecast is not overly optimistic.

  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 1.3364 95.76 2.23 15304 98.38
07/31/13 1.3301 97.92 2.67 15565 105.63
09/18/13 1.3363 98.28 2.76 15606 107.01
10/30/13 1.3764 98.18 2.48 15660 97.42
12/18/13 1.3696 103.81 2.89 16198 98.06
01/29/14 1.3649 102.31 2.71 15826 96.92

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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