Advance Look At The January FOMC Minutes: Is The Fed Starting Exit Strategy Discussions?
In advance of tomorrow's FOMC minutes releasae (2pm Eastern) Goldman shares some interesting thoughts on what may be disclosed. The key variable is whether, just like in the minutes from early 2010, the Fed will once again jump the shark (what is the creature of jump choice when jump is done twice in one year?) and commence discussions of exit strategy. If, as Goldman expects this might be the case, expect the market to plunge as there is nothing organic about this Fed liquidity driven pump of over 600 S&P points. To wit: "Is the FOMC turning its attention back to its ultimate exit strategy? It is premature to assume that the FOMC has any preset schedule for the “exit strategy” that was discussed widely—inside and outside the Fed—in early 2010. After all, the LSAP program is only about half completed, and the default assumption appears to be that it will run its course until mid-2011. That said, it is never premature for the committee to revisit its options, particularly during the longer two-day sessions that allow time for more strategic thinking. Thus, we would not be surprised to see some discussion, if only a brief review of familiar tools and strategies for the exit strategy that will ultimately be needed. The mere existence of such a discussion would not be meaningful in itself, though obviously the language surrounding it would have the potential for market impact, whether justified or not."
From Goldman's Ed McKelvey
The FOMC meeting held in late January produced no significant surprises, keeping the policy settings unchanged and modestly upgrading the committee’s assessment of the US economic outlook. Even so, market participants will scrutinize the minutes to that meeting, due for release tomorrow afternoon, for evidence of any shift in the committee’s views.
- In particular, these minutes will update the FOMC’s “central tendency” ranges for growth, unemployment, and inflation. We expect the committee to raise the 2011 growth range by about ½ percentage point. It is also conceivable that more meeting participants raised their estimates of the longer-run sustainable rate of unemployment. Changes in the inflation ranges should be modest—down for core, up for headline—and confined to the near term.
- Although the 11-member voting rotation was unanimous in approving the policy statement in January, the fuller discussion of views in the minutes could well expose differences of view on the appropriateness of the long-term asset purchases. And, although an exit strategy is some distance off, it is quite possible that the improved outlook motivated the committee to review its options once again.
The last meeting of the Federal Open Market Committee (FOMC), held on January 25-26, 2011, produced no major surprises when the policy statement was released in the early afternoon of January 26. In a unanimous decision, the committee kept in place its two key balance-sheet policies (the reinvestment of MBS and agency principal repayments in US Treasury securities and the continuation of the $600bn Treasury purchase program announced in November) and modestly upgraded its assessment of current economic conditions.
Although these results were as expected, market participants will still read the minutes of this meeting, due for release at 2:00pm EST tomorrow, with considerable interest. The key questions, as we see them, focus on how the committee’s economic outlook is evolving but include color on policy issues as well:
1. How much did FOMC members mark up their growth forecasts? This set of minutes will update the FOMC’s “central tendency” ranges for real GDP growth (fourth quarter to fourth quarter), unemployment (year-end) and both headline and core inflation (also fourth quarter to fourth quarter). These ranges were last updated at the November 2-3 meeting, when the committee decided to purchase $600bn of longer-term Treasury securities as a means of providing more monetary accommodation to an economy with a stubbornly high jobless rate and an underlying inflation rate that was too low for the comfort of most committee members.
The US growth outlook has brightened considerably since then, with many private forecasters marking up their numbers in response. For example, our forecast for real GDP growth in 2011 has moved up from 2.2% to 3.9% (fourth quarter to fourth quarter), due mainly to an improvement in underlying growth but also to the fiscal bill passed in mid-December; over the same period the comparable Blue Chip median has risen from 2.8% to 3.5%. Against this backdrop, we anticipate an upgrade to the FOMC’s 3.0%-3.6% central tendency range for growth in 2011, probably on the order of about ½ point. The growth ranges for 2012 and 2013 are already higher—about 3½% to 4½% in both cases—and are unlikely to move a lot from these levels.
2. Has their view on the longer-run sustainable level of unemployment risen further? The central tendency range for this group estimate of the so-called NAIRU (Non-Accelerating Inflation Rate of Unemployment) widened considerably in November, to 5.0%-6.0% from 5.0%-5.3% as of the June 2010 forecast. However, on closer examination the widening of this range reflected significant changes on the part of a few meeting participants. Whereas in June only two of 17 thought the longer-run level of unemployment was higher than 5.4%, in November five of 18 were in this category—enough to push the upper end of the central tendency to 6.0%. (The central tendency ranges omit the top three and the bottom three estimates.) Most of the others felt that the frictional unemployment rate had risen only slightly—perhaps by a tenth or two.
Although the unemployment rate has fallen by 0.8 percentage points in the past two months, the FOMC was aware of only the first of these moves when it met in late January, and that was from a 9.8% level that many observers regarded as distorted to the high side. Thus, changes to the near-term ranges—8.9%-9.1% for the fourth quarter of 2011 and 7.7%-8.2% for the fourth quarter of 2012—are apt to be small, on the order of one or two tenths of a point. And it is conceivable that the minority who feels that the longer-term jobless rate has risen to around 6% might grow a bit.
3. Did their inflation views change? We see the potential for at least small changes—in opposite directions—to the FOMC’s central tendency ranges for core and headline inflation in 2011. Although December readings on the PCE (personal consumption expenditures) price index and its core (ex food and energy) component were not available in time for the January FOMC meeting, it was clear that the core index would post a year-to-year increase below the 1.0%-1.1% central tendency range for 2010. (The actual figure was 0.8%.) We would be surprised but not shocked if this failed to prompt a modest reduction to the upper end of the 0.9%-1.6% range for 2011. At the same time, the ongoing pressures on prices of food and energy could well have prompted an increase in the headline range of 1.1%-1.7%. However, we see no reason why the longer-run range for (headline) PCE inflation should change from the 1.6%-2.0% level reported for November.
4. How did the staff forecast change? The staff updates its forecast for every FOMC meeting, so it had the opportunity to take on board some of the changes described above in the outlook it presented at the December 14 meeting. However, the minutes of that meeting indicate growth upgrades were confined to the “near term.” With most indicators continuing to suggest underlying strength, especially when adjusted for weather influences, we expect to read about further upgrades at the January meeting.
5. How deep are the differences of opinion with respect to the long-term asset purchases (LSAPs)? The unanimous vote at the January FOMC meeting should not be taken as a sign of harmony within the group. At least two voting members (Presidents Plosser of Philadelphia and Fisher of Dallas) plus two more participants (Presidents Lacker of Richmond and Hoenig of Kansas City) have expressed reservations if not outright opposition to the purchase program now in progress. In particular, both of the voters in this group have indicated that they would oppose the extension of this program, at least under current economic conditions. While it is unlikely that the committee formally considered an extension of LSAPs (this is unlikely until the April 26-27 meeting), any reference to the possibility would likely have drawn some opposing views by members of this group.
6. Is the FOMC turning its attention back to its ultimate exit strategy? It is premature to assume that the FOMC has any preset schedule for the “exit strategy” that was discussed widely—inside and outside the Fed—in early 2010. After all, the LSAP program is only about half completed, and the default assumption appears to be that it will run its course until mid-2011. That said, it is never premature for the committee to revisit its options, particularly during the longer two-day sessions that allow time for more strategic thinking. Thus, we would not be surprised to see some discussion, if only a brief review of familiar tools and strategies for the exit strategy that will ultimately be needed. The mere existence of such a discussion would not be meaningful in itself, though obviously the language surrounding it would have the potential for market impact, whether justified or not.
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