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Will the Fed Bring Clarity or Confusion?
Will the Fed Bring Clarity or Confusion?
Next Wednesday, between 12:30 and 2PM, we will get a ton of new information to digest and analyze. The Federal Reserve will make a series of statements while unveiling its new communication effort. A portion of the new information will be contained in the revised Summary of Economic Projections (SEP).
The Fed has worked long and hard on its new communication policy. The question is, “What will people think and how will the markets react?” I believe that there is a very good possibility that the Fed's plan will add to uncertainties regarding monetary policy. Contrary to its objectives, the new "openness and clarity" may end up causing the confusion.
The Fed will provide information regarding member's thinking on the future size of the Fed’s balance sheet (BS). This is critical. We might see a consensus view that the Fed’s balance sheet will grow another 25% over the next 18 months. That would bring this headline:
Fed Signals Another $1T Of QE
Stocks rise sharply. Oil, copper, gold see largest one-day rise in two years
TIPs spreads widen to 2.5%
We could just as easily get a consensus opinion that the Fed’s BS will remain unchanged for the foreseeable future. That would also be a shocker:
Fed Forecasts End of QE
Global stocks in broad retreat.
Next move is to tighten?
The Fed will provide information regarding its thinking on GDP, inflation and the timing of an increase in the Federal Funds rate (new info). This is all potentially explosive data. The Fed's most recent read (November) on the economy painted a somewhat upbeat picture. Almost all of the data since then has been on the positive side. While I doubt the Fed will signal that happy days are here again, it would appear likely that a +2.0% growth forecast for GDP is in the cards. How is the Fed going to square this (relatively) upbeat economic assessment with a loose monetary policy that is currently at biblical historic levels? The answer is, "It can’t".
Fed Predicts Improvement. To Keep Monetary “Pedal on the Metal”
Global Central Bankers Critical, OECD head says, “Reckless”
Dollar in rout, Gold rises $65
For the Fed to continue ZIRPing, Twisting and QEing, it has to support the policy with a bleak assessment on the economy. A negative outlook is the only scenario that justifies maintaining, let alone expanding, the existing "emergency" monetary measures.
I think the Fed will hint that monetary contraction is in our future (about a year away, if not sooner). To me, the only circumstance that would avoid this conclusion is if the Fed were to come out with some decidedly disappointing expectations for growth and unemployment for the next 36 months. This too would make for headlines:
Fed Downgrades Expectations
Three More Years of Sub-par Growth
A downbeat assessment would influence the Congressional Budget Office (CBO). On January 30, the CBO will release its ten-year economic outlook. This is what they said a year ago:
The CBO forecasts for 2011 were off the mark. I think they will have to significantly downgrade their expectations for 2012 and 2013. The CBO numbers are the basis upon which long-term estimates for future deficits and the financial status of Social Security (and other big entitlement programs) are made. The Office of Management and Budget (OMB) uses these numbers to craft legislation for the White House.
I find it interesting that the forecast that would best serve Ben Bernanke’s desire to maintain and expand monetary policy is exactly the opposite forecast that the CBO “wants” to use in evaluating America’s macro economic outlook.
On Friday, Morgan Stanley’s David Greenlaw commented on prospects for the Fed’s announcements this week:
In sum, there seems to be some risk of significant market confusion next week.
At the end of the day, we’re concerned that market confusion next week could lead to an unintended tightening of financial conditions.
Mr. Greenlaw is assuming that the Fed will produce an economic forecast that will force a conclusion that further easing is off the table. We may get that. The alternative is that the Fed downgrades its collective assessment for growth, inflation and interest rates. Should it do that, the folks at the CBO will have to either scramble to adjust their own expectations, or face severe criticism for presenting a rosy view of the future while the Fed is singing a different tune.
What will we get next week? Will it be clarity?
Or confusion?
Either way, I can’t wait.
Note: This is a Banksy. What original oil painting is this from?
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Let me think. Hmmmm.
This is an election year. Enough said?
However, that doesn't mean they'll call it QE.
Help for homeowners, in the form of large-scale agency mortgage purchases is the ONLY politically teneable strategy in an election year to pursue further monetization. The Fed themselves right up in political cross-hairs when they sent recommendations to congress. Afterall, who can argue with such a noble effort to help the American homeowner?
That is not the real agenda here, rates are already at all-time lows. It is as easy as pie to see right through this scam.
I think you are correct; I think this is the plan- buy more MBS. I think Bernanke will point to Europe's "flaws" as to why he needs to keep monetary policy as loose as a $20 hooker.
No, instead they will call it "help for homeowners" and perform dollar dillutive open market purchases against agency mortgages. If if works like QE2, you can expect nominal rates to move upward and real incomes to shrink. Agency spreads may compress a bit against treasuries, but I seriously doubt it will compensate.
Higher nominal spreads between short-term and long-term bonds are great for the FEDS BANKS, which benefit from the positive carry. But let's be honest, rising rates do nothing good for the average American. Maybe you get a few sentiment buyers that are suckered into buying an asset still in decline. Spread the pain.
The other benefit to the banks: narrower credit spreads and reduced real long term financing costs. Dillutive open market purchases force investors into chasing yield. Bernanke wants Grandma & Grandpa to load up on junk bonds. Great strategy.
Extend leverage. Promote risk-taking. Discourage savings. Reduce real income. Protect the banks. This is what the Federal Reserve is all about.
END THE FED.
I agree with everything you wrote (and you wrote it well) except for this:
I understand if someone doesn't know how to trade, or if someone has an FA who doesn't know how to trade, they could get caught in a rising rate nightmare, but let's face it, higher rates would be great for savers, and the financial environment should be focused on helping people save, not spend, their money.
I agree, higher real rates would be great for savers. Higher nominal rates would not necessarily be better. The real rate is the coupon value of the bond less inflation. In an otherwise steady-state environment, a bond with a coupon value of 3% with an inflation rate of 1% is equivalent to a bond with coupon value of 10% with an inflation rate of 8%.
This is what ZIRP and QE are all about, lowering real rates to help the heavily levered and hurt savers. Real rates (especially short-term low risk securities) run a negative rate in this environment.
Bernanke HAS NOT COMMUNICATED AT ALL THAT PETER IS BEING ROBBED TO PAY PAUL, but that is the absolute bottom line. It's pretty fucked up if you think about it. We should not be encouraging recklessness and discouraging savings. All good intentions aside, QE IS FAILING. The Fed will absolutely run out of time, politically, to play this game for much longer. They need to be honest with the American public about what this policy really means. This is not part of their new communications strategy.
The sad fact is, we (the rational, prudent, ethical, frugal) can easily defeat Bernanke and the rest of the predators-that-be and predator-class. All we have to do is put 100% of our savings into physical gold, silver, platinum, palladium, rhodium, etc.
I did that years ago. A very small but increasing minority are doing so today. But if even a modest minority of savers put all their savings into REAL STUFF, the predatory scams of the federal reserve would be destroyed.
Wake up humans. Get real. Get physical.
You forgot "prevent true price discovery no matter what."
They should call it : BB 1
Bubble Bellies 1
And no worry about the tools and merchandise! Already done!
http://www.geardiary.com/wp-content/photos/474221120_444075103a.jpg
As with all successful Ponzi schemes, the Fed will present the illusion of money as a plausible and easy to swallow scenario. Reality will be portrayed as a confusing side issue.
http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/
The fact that the global "elite" are hiding large amounts of fiat money is no suprise, same as it ever was. This time is indeed different and what is suprising is that the current rate of fiat destruction is unprecedented, so these "elites" are losing purchasing power faster than ever (unless they are actually buying and hoarding PMs). Amazing how people so stupid come to be "the elite". Again, same as it ever was. Fourth turning etc.
The big question is whether the world will continue to buy equities as an inflation play in the face of business downturns, declining profits, massive unemployment, civil strife, delevering, asset liquidation and credit money destruction.
S&P 2000 or 200?
The ICI numbers indicate that the carefully orchestrated complacency permeating the equity markets has drawn pause within the collective Retail/Main Street. The mass evacuation has taken a break, while we collect our thoughts. Those circumstanced to feed their hunger on Food Stamps are but a stark mirror reflection of the equity investors feeling the pangs for capital appreciation and dividends. ie the money has to be in the market, because we cannot see it in our jobs, nor our prospects.
Our logically based fear of equity markets is growing weak, in the face of increasing need staring down on it.. All that is needed is the authoritative words necessary to validate the denial.
Expect bread and circuses from the Fed to instill a blinding comfort.
The point to all of this was not entirely to pump an equity market.
The object was to create a desperation which would overwhelm any common sense or sensibilities.