Welcome To Chez Shalom: Here Is The Menu For Tomorrow's FOMC Lunch
Concerned what will happen tomorrow at 2:15pm? You should be: after all the Fed is now in charge of everything, and this (in)decision will impact your life much more than who the fattest person on this season's Biggest Loser is. Here is this year's most prescient economist, Jan Hatzius, once again doing the best summary on the four possible outcomes of tomorrow's FOMC decision. In a nutshell these are: i) No substantive change in the policy statement, ii) Recognition of a weaker economic outlook, but without an explicit signal that renewed unconventional easing is under consideration, iii) An explicit signal that renewed easing is under consideration, and iv) An announcement of renewed easing. Our personal choice is entree #2, although this being Chez Shalom, no matter what, it will always end being an omakase type of affair - fiat prix tres unfixe. (Oddly enough, Chez Shalom still does not have a Zagat's entry. As everyone in America eats (or defecates) there every single day, it is about time our more industrious readers provided their feedback and rating).
From Goldman's Hatzius and Tilon
FOMC Preview: Several Options on the Menu
- The key question at the September 21 FOMC meeting is how far the committee will lean in the direction of renewed policy easing. Will it formally acknowledge a weaker growth outlook, and if it so will it go further by hinting at—or actually implementing—additional easing measures?
- In our view, the most likely outcome is a more dovish statement that explicitly reflects a dimmer economic growth outlook and nods in the direction of further easing via changes to its forward-looking guidance on policy. Though we ultimately expect the Fed to purchase at least another $1 trillion in Treasury securities, we think it probably will take more time for the FOMC to reach agreement on such a major step.
The key question at the September 21 FOMC meeting is how far the committee will lean in the direction of renewed policy easing. The tone of the statement will depend principally on how the FOMC describes the economic outlook (the growth outlook in particular), and whether it signals the possibility of (or actually announces) additional balance sheet expansion. The choices along these dimensions yield four basic choices for the statement, ranging from most “hawkish” to the most “dovish”:
1. No substantive change in the policy statement. One option is essentially to repeat the August statement, with only minor changes in wording. The justification would be that the data since the last FOMC meeting on August 10 have been roughly in line with expectations. As shown in Exhibit 1 on page 2 of last Friday’s US Economics Analyst, our US-MAP scoring system of economic indicators–which is largely based on how the economic indicators compare with the Bloomberg consensus as of just before the release—has averaged around zero over this period. Chairman Bernanke suggested in his Jackson Hole speech that further easing could be triggered by an increased threat of deflation and/or a significant weakening in the economic outlook. One might therefore argue that the committee will take the view that these risks have not increased significantly, and that it is therefore inappropriate to change the statement. Indeed, the description of the economy in the August statement—indicating that the recovery “has slowed,” “[h]ousehold spending is increasing gradually,” and “employers remain reluctant to add to payrolls”—remains accurate. This would be the most “hawkish” of the options, and would imply that the Federal Open Market Committee, or at least a significant faction of it, requires more proof to warrant additional quantitative easing (QE).
2. Recognition of a weaker economic outlook, but without an explicit signal that renewed unconventional easing is under consideration. A somewhat more “dovish” alternative would be for the committee to indicate that the economic outlook has in fact deteriorated since the last meeting. Although the monthly indicators have on average been in line with expectations, those expectations were quite low, and many economists have cut their longer-term growth and employment forecasts over this period. For example, the median forecast for real GDP growth in the second half of 2010 fell from 2.6% (annualized) in the Blue Chip Economic Indicators survey released on August 10 to 2.1% in the survey released on September 10. It is likely that both the committee and the Fed staff have revised down their forecasts as well, perhaps by a similar amount. If the committee indicates a downward revision of its forecast, this may be viewed as an implicit signal that additional easing has become more likely. The FOMC could acknowledge a weaker forecast via one or more changes to the first paragraph of its statement, perhaps indicating that recent growth is below trend or that resource utilization is not rising materially.
3. An explicit signal that renewed easing is under consideration. This could take the form of an added phrase or sentence in the forward-looking policy discussion. An example would be the following modification of the “extended period” sentence: “The Committee…continues to anticipate that economic conditions…are likely to warrant exceptionally low levels of the federal funds rate for an extended period and potentially a further expansion of the Federal Reserve’s balance sheet.” Another option would be a bald statement that the committee “is considering” additional unconventional easing.
4. An announcement of renewed easing. Finally, of course, the committee could simply announce that it will ease monetary policy anew. In this case, we would expect an asset purchase program focused on long-term Treasury securities that would ultimately total at least $1 trillion in size, though whether the committee is prepared to state this amount up front or begin with a smaller figure and leave open the possibility of further moves remains an open question.
How likely is each of these options? We cannot rule any of them out, but we suspect the discussion will focus around options 2 and 3, with a majority of the Committee willing to acknowledge a slightly softer growth outlook but more vigorous debate about the desirability of signaling a possible easing step. In the end, we think the FOMC will give at least a nod in the direction of further easing via changes to its forward-looking guidance on policy but stop short of actually announcing the implementation of a new program.