Advance Look At The January FOMC Minutes: Is The Fed Starting Exit Strategy Discussions?

Tyler Durden's picture

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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Turd Ferguson's picture

Some of The Turd's favorite oxymorons:

Jumbo Shrimp

Jobless Recovery

Peace Process

Congressional Oversight

Fed Exit Strategy

dlmaniac's picture

Inject demand (Nancy Pelosi)

duncecap rack's picture

Federal reserve. Like they got a ton of money they saved up by careful saving to judiciously spend when need be.

william the bastard's picture

Turd

(frontrunning the top post or not at all- refusing any discussion with the gold pimp swap meet sidewalk barker):

A perro flaco, todo son pulgas

Quintus's picture

This is just another attempt at jawboning to keep the market uncertain which way things are headed.  The only exit strategy The Bernank is seriously considering involves a G6 loaded with gold and a non-extradition country.

Bringin It's picture

Exactly!  What are they gonna do?  What are they gonna do?

Some already know.

Why we don't want the FED.

BigJim's picture

Well... maybe they've decided it's time for another dip, so they can announce QE3 to enable the banks can buy up anything they don't already own?

flaunt's picture

Exit Strategy:  Hold on and pray.

Next?

Alchemist's picture

"Fed liquidity driven pump of over 600 S&P points"

Where do you get the "600" ? Have you seen credit spreads? earnings?

One can understan blaming the fed for 100-200 pts of rally but 600 is a bit overdoing it.. What analysis are you using to come up with that number other than" lets see what i can pull out of my ass"


Hedge Jobs's picture

Alchemist, you are obviously not very familiar with the initial stages of monetary inflation. Go and do some homework before making stupid comments.

Im more concerned about who wrote "the longer two-day sessions that allow time for more strategic thinking" was that TD or GS? Strategic thinking? I always imagined them sitting around doing satanic rituals, sacrificing virgins and that sort of thing.

topcallingtroll's picture

As you might have guessed.....no analysis.

Hedge Jobs's picture

There is about 5 months worth of analysis posted on this website that has also been published by the FED itself. They are called POMO schedules. Over $300 billion in FED created money has now been pumped into US economy. You really think this free money doesn't effect company earnings and bond spreads as it goes through the economy? Monetary inflation induced economic gains are illusory. Believe in them at your own peril.

morph's picture

Well the few trillion in QE1 + QE2 should just about cover 600, points.

Stocks are a function of liqudity not value my friend.

More liquidity just means more ridiculous valuations.

razorthin's picture

"Science of Economics" - how's that for another oxymoron.  Because You cannot isolate the Fed liquidity "variable", and you cannot know how other factors would have shaken out without it, in this bizzare case it might very well be the only "independent variable".  Conjecture might suggest the liquidity is responsible for more than a 1,000 SPX points.

Shameful's picture

The exit strategy?  You mean all the C-130s loaded with gold and hookers?  Yeah I'm sure those are fueled and ready to go at a moments notice.  Probably talking about what island paradise they have picked out for themselves.

If you meant raise rates or stop QE, well then look at the C130s.  Would see them using them once interest rates took off with no one to buy the infinite deficit spending.

LostWages's picture

+10.

Another option that they should, but sadly won't use is "Jump You Fuckers!"

Caviar Emptor's picture

Exactly. C130s staffed by black ops dudes 

slewie the pi-rat's picture

 

not 2 mention lazer guided surgeons & mini gats, hef Zquat

TradingJoe's picture

"exit strategy" :-()))))))))))) lets just call it CRASHHHHHHH...and get over with it, eh?!

duncecap rack's picture

The squid is right. This is important. If they talked about exit strategies at all the market might have a grand mall seizure and the whack-a-mole commodity markets might get even crazier.

Notimpossible's picture

QE3 is dead, in fact the trade of the year will be taking the other side of the perception of infinite QE, as a modest or even weak economy won't trigger further quantitative easing. Which means we get potentially a growing economy but multiple contraction. PM's look vulnerable, inflation expectations look too high, and the only question is who will be the greater fool in the QE trade.

Shameful's picture

So with no QE, short treasuries and make a fortune.  Looks liek the Chinese are full and action packed with problems, the Japanese will get sick sooner or later.  I can't imagine the guys masquerading at the UK will keep up buying (unless it is the Fed).

The reason why it will be QE forever is there is not enough capital floating around the planet at the rates needed to keep the ponzi moving.  No QE and rates move and the economy shudders to a halt.  The end game of no QE is dollar death.  So might take a beating initially but the long term PM holder will get paid when the bond market beats the tar out of the US with no QE.

Notimpossible's picture

The natural state of the economy coming out of the credit bubble is Deflationary, the only thing keeping it from reverting to that state is big reflation. Take the pedal off the gas and yields drop...QE artificially lifts inflation expectations/yields...popular misconception, look at yields when QE 1 ended.

Shameful's picture

So there is really an infinite pile of capital out there aching to go into low yield US paper?  1.5 trillion a year, world GDP is what 62 trillion?  My math tells me that is about 2.5% of world GDP that needs to be saved just to roll into the maw that is the Fed Gov.  Every year, forever.  Oh and turns out basically all nations and states are running deficits, but I guess there is infinite capital out there for them to.  Good thing that these govs produce lasting value...

Go long on Treasuries then, I don't care, your money or your investors.  We should head into a deflationary depression, and if they step off the gas that should be true.  But where is the cash going to come from to fuel the world wide debt binge?  People will eventually realize that the full faith and credit of a bankrupt nation doesn't mean all that much, then the dollar is looked at in a different light.  I suppose you can argue that the Fed and states will produce a balanced budget, but that's not something I would place money on.  After all in a deflationary environment tax revenues should go into a tailspin...raising the deficits further.

Hey maybe I'm wrong, hope I am.  I just don't see a way out without radical cutting.  And lets face it, don't see a lot of willingness to do that.  We are not Japan, our savings rate does not let us self finance this debt.  If there is no Fed buying then it must be the kindness of strangers.  And those strangers are looking lean.  No QE kills oil prices and ME oil money, China is staggering, Japan is broke, EU is punch drunk...I'm really just not seeing where the money will come from.

hambone's picture

So there is really an infinite pile of capital out there aching to go into low yield US paper?  1.5 trillion a year, world GDP is what 62 trillion?  My math tells me that is about 2.5% of world GDP that needs to be saved just to roll into the maw that is the Fed Gov

Shameful,

you are far too optimistic - look at all the T's in need of rollover...you are only looking at new issuance (which will be closer to $2T).  US has $14.2T in debt w/ average maturity of bout 5yrs.  Given US never pays debt but only rolls it over, on average, would mean US needs to roll 1/5th of debt every year...that's a little under $3T that is needed to repay investor principle and allow for repurchase of a new T (the actual amount of money rolled is much higher as much is in very short term bills getting rolled every 30, 90, etc. days).  But for our purposes it takes $3T of investors wanting to maintain T's exposure plus $2T in new purchasers. 

That is $5T annually in low yielding T's "someone" needs to buy in the face of dollar devalaution and ultimate inflationary fears.  And the % of world GDP getting sucked into simply maintaining T's is getting closer to 10%...a complete aberation from historical norm when this # was closer to 1% to 2% as recently as '00 and at yields at the short end that were near 5% rather than .5% offered now.

Since this is multiplied globally by many nations and obviously this money does not exist - Fed and CB's are creating massive "money" to maintain the debt market.  Inflation is guaranteed and QE cannot stop...anyone suggesting an end to QE must first explain where the dollars to maintain the debt market would come from...cause absent Fed "money" every other asset would have to be stripped to simply maintain governmental debt or run a balanced budget and begin paying down debt...haha (choosing the long term over short term, the painful cure over pain killer ain't our thing).

BTW - debt (not even considering unfunded liabilities) is now or will shortly be larger than stated GDP.  Growth of debt and interest repayments is growing faster than tax revenues even based on 5% GDP growth.  Those that may feel queasy or slightly ill are likely only perceiving the motion that is the increasing inertia of our DEATH SPIRAL.

Caviar Emptor's picture

Agree. They try to talk a good game but don't be fooled: they know if they end QE or any expansive monetary stimulus policy (whatever new name they want to give it) they'll soon have to auction off the Statue of Liberty and Golden Gate Bridge. The US is no longer in a position to  move unilaterally either. The current group think by central bankers and politicians is globally sustained stimulus. Keep in mind my theory of mutually assured financial destruction: US Treasury is too dependent on China not to keep stimulus going. And Europe needs to keep their stimulus going. There are reasons beyond economics why this situation can not be stopped. 

Hedge Jobs's picture

"QE3 is dead" Yeah right! its dead while the stimulatory efects of QE2 go through the economy but once they stop its QE3 or deflation. Just like with QE2 once QE1 wore off. Deflation will wipe out the banks so Bernanke, who is employed by the banks, will never allow it to happen.

"even weak economy won't trigger further quantitative easing"

Why not? This was enough of a reason to trigger QE2 why not QE3?

 

Math Man's picture

Goodbye, PMs and commodities.

The speculative QE demand will quickly turn in to supply.

I don't think stocks will crash though... ending QE means the recovery is stronger than anticipated.

And that will be read as very bullish.

Caviar Emptor's picture

I'll take the other side of that trade gladly after a brief dip

Caviar Emptor's picture

I'll take the other side of that trade gladly after a brief dip

High Plains Drifter's picture

Hey mathman, don't ever make the mistake of confusing commodities with real money as stipulated by our own constitution as well as thousands of years of human history.

 

Read my lips. QE will never end. It is about much more than getting the economy going again. It is about the destruction of the United States.

tarsubil's picture

I don't think it is so much about destroying the US as much as it is about buying and owning the US.