FOMC Preview: Nothing Now, Moar Later

Tyler Durden's picture

Last month, hours after the announcement of QEternity, we said that in validation of the 'Flow' model taking over from the Fed's flawed 'Stock' model, the Fed will have no choice but to continue the long-end $85 billion in monetary flow addition to the market, if not economy (i.e. expand the QE program from $40bn per month to $85bn per month starting in January - in order to maintain the 'flow' post-Operation Twist). Last night, Goldman has officially agreed with us (as has Bloomberg's chief economist Joe Brusuelas). It appears that starting January 2013 Ben is really going to town. But don't expect this to be announced today. It will, as Goldman speculates, be disclosed at the Fed's December FOMC meeting. For now, two weeks ahead of the election, expect more "autopilot" from Bernanke as coming up with any surprises 'now' would be seen as beyond political.


Via Goldman Sachs' Jan Hatzius: Waiting For December

  • We expect virtually no changes in Wednesday's FOMC statement, except for small tweaks updating the description of recent economic data and recognizing that QE3 has now begun.
  • The December 11-12 meeting will be much more interesting. We expect the QE program to expand from $40bn per month now to $85bn per month from January, in order to keep the pace of asset purchases constant even after the completion of Operation Twist. A shift to outcome-based forward guidance (instead of the current "mid-2015" calendar-based guidance) and/or adoption of an FOMC consensus forecast for the economy are also under discussion, although we are not forecasting either at this point.

Q: What do you expect from the FOMC statement on Wednesday?


A: Very little. The first paragraph describing the economy might see a few small changes, but the only one that is clearly necessary is a reformulation of the sentence on inflation. The sentence currently notes that "[i]nflation has been subdued, although the prices of some key commodities have increased recently." Since September 13, headline inflation has been higher but core inflation remains low and commodity prices have stabilized, so we might see a reformulation along these lines. The committee might also upgrade its assessment of the labor and/or housing market slightly, possibly noting the decline in the unemployment rate or the faster recent pace of improvement in the housing indicators. That said, we do not expect them to alter their assessment that the unemployment remains "elevated." We do not expect any meaningful changes to the remainder of the statement, although the language is likely to be adjusted in order to recognize that QE3 has now begun.


Q: What about the December 11-12 meeting?


A: This will be a much more interesting meeting. The most immediate question is the pace of asset purchases after Operation Twist (or the Maturity Extension Program in Fed parlance) concludes at the end of December. We believe that the committee will be reluctant to do anything that markets would interpret as a slowdown in the pace of monetary easing, such as an indication that the pace of asset purchases will slow in the foreseeable future. Our baseline expectation is a continuation of the current pace of asset purchases of $85bn per month on an open-ended basis, which would imply that the current $45bn per month in twist-financed Treasury purchases is replaced by $45bn per month in QE-financed Treasury purchases. It is possible that the committee will decide to lower the average maturity of the Treasury purchases slightly in order to avoid raising their ownership of specific longer maturities too much. They could do this without reducing the pace of duration removal, as they would be financing the purchases with base money creation (which has zero duration) instead of sales of shorter-dated Treasuries (which have positive duration).


Q: Will the committee move to an Evans-type rule, or some other type of outcome-based forward guidance?


A: In principle, there is widespread agreement that outcome-based guidance would be preferable, for the reasons laid out by Michael Woodford in his 2012 Jackson Hole paper and discussed at length in our own research. The most likely form of outcome-based guidance would be some version of the "Evans rule," defined as a commitment not to raise the federal funds rate until the unemployment rate had fallen to a particular threshold unless inflation had risen above a particular threshold. (Fed officials would undoubtedly be careful to specify that unemployment below the threshold would be a necessary but not sufficient condition for a rate hike; it is less clear whether inflation above the threshold would be characterized only as a necessary condition for a hike or also a sufficient one.)


However, the practical obstacles to such a move are still significant. The biggest issue is that the absolute level of the unemployment rate may not be a good indicator of the employment side of the mandate. This is partly because there is uncertainty about the structural unemployment rate, and partly because the "participation gap"--the difference between the actual labor force participation rate and the estimated structural participation rate--may embody almost as much labor market slack as the unemployment gap. This means that the unemployment rate alone does not pin down the overall amount of labor market slack very precisely. One could in principle address this by formulating the outcome-based guidance in terms of a combination of the unemployment rate, the participation rate, and perhaps other labor market measures. But in practice this would be very difficult to communicate and would risk introducing substantial volatility into the market's monetary policy expectations and thus broader financial conditions.


The implication is that we suspect the committee is stuck with the calendar-based guidance for some time yet. Nobody really likes it, but that has been true ever since the "mid-2013" language was adopted at the August 2011 meeting, and a better alternative may continue to prove elusive. We will probably learn more in the minutes of the October 23-24 meeting.


Q: Will the committee move to a consensus economic forecast?


A: The other innovation under discussion is the adoption of a consensus economic forecast by the committee as a whole. The committee has now conducted two experimental exercises intended to shed light on the feasibility of adopting a consensus economic and monetary policy forecast, and a broader discussion was on the schedule for this meeting. However, there are several questions surrounding such a move that have not yet been cleared up.


First, who would drive the consensus forecast? Would it be based on a proposal by the chairman developed in conjunction with the Board staff, or a more democratic process that involves initial input from all participants?


Second, what would be the monetary policy assumptions underlying such a forecast? Would it be based on constant interest rates, market expectations, or the committee's own expectations determined simultaneously with the economic forecast?


Third, how would FOMC participants indicate their personal agreement or disagreement with the consensus forecast? These are all knotty questions to answer, and we believe that it will be difficult to agree on moving to a consensus forecast anytime soon. However, the minutes will again provide more information on where this discussion stands.

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AllThatGlitters's picture

Gold selling off before minutes:


Does that mean buy gold during the sell-off, expecting it to head higher after the release?

swissaustrian's picture

Don't forget tomorrow's options expiry. It's no coincidence that gold trades exactly at $1700 7 minutes before the COMEX closes. I guess we'll be at 1699.5 by the close.

AllThatGlitters's picture

Ouch, I did almost forget!  Thanks SwissAustrian.  Can't keep up with everything.

Kaiser Sousa's picture

its all total bullshit...

Yeah, someone out there is selling physical Gold.....


AllThatGlitters's picture

Just keeps trickling down in a relatively controlled manner.  Seems it should reverse in a rather dramatic fashion, no?  

Or, is this a front-running preview of what happens after the release.

spastic_colon's picture

Translation: announcement coming today

Kaiser Sousa's picture

its just the "in your face" blantantcy of the fucking manipulation that pissies me the fuck off...

here China, the new power on the block, is buying 500 & somethin tons of real money - more the the IMF and ECB...

Iran trading Oil for real money, and all the other Central Banks scrambling to get their hands on real money b4 the debt coupon dollar paradigm collapses, and we get this bullshit action over and over again...

total fucking bitch ass sociopath banker bullshit....


TwoShortPlanks's picture

....and you're complaining about being able to buy "real money" for just 1,700 for what reason?

Are you the type of person to get frustrated that you can't pay off your mortgage too? The two are the same, long term investments.

I hope their games go on for years, coz weak hands get impatient and sell their metal for a jet ski, and I get to buy it cheaper. It's like low interest rates on a variable want low rates to last forever coz it saves you money. Well, low Gold prices do exactly that too.

People who get impatient do not belong buying Gold. They are showing their psychology/addiction for the quick buck. That's been the name of the game for decades; quick bucks! But now the game has changed, and they still expect Gold to be a quick buck.

Fuck me, this isn't 2012, this is 1912. If you trade, you're a Dinosaur. The name of the game now is work and save. Buy physical assets regularly. Min debt. No credit card. Manageble mortgages only. Buy Gold, Silver, Land and accumulate that which cannot be cloned.

Slowly but surely, everyone will either learn to, or be forced to, adopt how our grandparents thought of money and wealth, or the banks will keep you forever poor. People need to learn how to do without until you save for what you want (ring any bells?). The markets WILL eat you up if you continue to play the quick buck game. There is no wealth to be made right now, the name of the game is POSITIONING-POSITIONING-POSITIONING.

Less than 1/100th of 1 percent of the population understand this fact (my belief). I know this coz they're still out on Friday and Saturday night drinking and partying. These people will be the last to learn.

Look at everything you've seen in the global economy and markets over the past 4 years and tell me I'm wrong. I dare ya!

Atlasshruggedme's picture

Made a silver purchase this morning... Easier to trade.

fonzannoon's picture

if Romney wins they are going to have to crash the market so he can give ben the cover to print us to death without Romney taking flack from the morons who actually thought it would be different with him in there.

malikai's picture

The financial repression will continue until morale improves.

Cognitive Dissonance's picture

I can't wait until the flow turns into a fire hose.

<Long rubber fishing waders and PMs.>

SheepDog-One's picture

Don't worry, the FED has this shit....just keep multiplying by X9 monthly until morale improves.

ebworthen's picture

Moat now, moat later:

Monetary moats, moats surrounding Washington and Wall Street filled with debt money, unpaid obligation debt, future draconian taxes and austerity debt money - protecting the castle of the elites from the wrath of the peasantry. 

More moat monetization money!  More, more, more!

Man the parapets!  Muster the I.R.S. bowmen to their posts! 

Call the CONgressional priests of the Church of our Holy Equivocation to the chapel!  Light the incense of obfuscation!

Summon the pike-men and pike-women of the Judicial Regiment of Peeking Justice to the main gate!

The peasants and their mewling children must be thrown into the moat of debt!

Defend the castle of crony capitalism at all costs!

fonzannoon's picture

I hope ZH is making a fortune today because I have accidentally clicked on Ally banks Fkin pop ad at least 15 times.

Skateboarder's picture

You might have generated anywhere between a fifteenth of a cent and fifteen cents. Get this man a beer!

orangedrinkandchips's picture

Moar or Moher? As in CLIFFS OF MOHER?


Impressive and steep.

ekm's picture

Does anybody pay attention to the Fed now?

Since QEn, I didn't know Fed still mattered.



Zero Govt's picture

"...Bernanke coming up with any surprises 'now' would be seen as beyond political..."

the Fed and the US Govt are joined at the hip, no politicians no private cartel monopoly on money license, no taxpayers to finance the money tree and finance the subversion and continued theft of societies production

the Fed are so political their cartels lifeblood depends on it

Stop Paying Tax ...End the Fed

Mesquite's picture

...joined at the hip...

Or, somewhere...

Peter Pan's picture

Dear 'Mr Bernanke,

I thiink there are about $13 trillion dollars worth of mortgages in the USA,
At 4% interest this works out to $520 billion.
Whilst money printing is not my preference, why not spend 6 months of QE of 6 x $85 billion and pay everyone"s mortgage for a year?
This will give the USA some much needed breathing space by freezing all foreclosures, taking away the stress from families and enabling the payment of other outstanding bills which might avert a tremendous number of bankruptcies. During those 12 months the goons in congress will have to come to their senses and come up with a new vision and plan for America because it is obvious that the strategies of the last 30 years have only broken the back of a once mighty nation. They cannot forever rely on monetary policy to run the country.

By the way, anyone who has their interest paid for the year should have a freeze placed on their ability to run up any new debt.

Yours sincerely


nastaking's picture

One of the new form factors that will showcase Windows 8 is an 11.6in, dual-screen laptop from ASUS called the S20 Table.