FOMC Preview: Expiration, Extension, And 'Evans' Rule

Tyler Durden's picture

At the top of the agenda for today’s FOMC meeting is deciding what to do about the Maturity Extension Program (MEP). SocGen agrees with consensus (as we noted the day QE3 was announced means a ~$4tn Fed balance sheet is on its way) that the MEP (Twist) will be converted into outright QE. The size is more uncertain, but we see several reasons why the current pace of $45bn/month should be maintained (which combining with the $40bn MBS means the Fed’s balance sheet is expected to increase by $85bn/month from January onwards). There has been no “significant” improvement in the outlook for employment (recent data is likely to be played down by Bernanke). Scaling back monetary accommodation also seems at odds with the looming fiscal contraction which could dampen growth in early 2013, which SocGen suggests will lead to the FOMC’s economic forecasts being updated (and downgraded we suspect) as the 2013 GDP forecast of 2.5%-3.0% looks too high in the context of contractionary fiscal policy and is at risk of being revised down. As for the “Evans Rule,” we believe that it will be adopted eventually, but don’t expect an announcement for now.

Via SocGen:

Deciding what to do about the Maturity Extension Program which is set to expire at the end of the month will top the agenda at today’s FOMC meeting. At December 31, the Fed will have no short-term Treasury holdings left in its portfolio; hence extending the program is not an option. We believe that the Fed will opt to continue buying Treasuries outright and finance the new purchases by increasing excess reserves. In other words, the growth of the Fed’s balance sheet will accelerate from the current pace of $40bn/month.




There is strong consensus that Treasury purchases will continue beyond December. The size, however, is more uncertain. Our own expectation is that the Fed will continue buying at the long end of the curve to the tune of $45bn/month. This view was challenged last week by St Louis President Bullard who suggested that the pace could be scaled back to $25bn/month. His rationale was that outright QE is more simulative than the twist, allowing the Fed to buy fewer Treasuries while still providing the same amount of accommodation. However, we see several arguments against scaling back the size significantly below $45bn.


1. Market is priced for $45bn. A Reuters survey of primary dealers conducted last Friday found a median forecast of $45bn. Therefore any meaningful reduction in the monthly run rate would likely induce an unwarranted backup in bond yields. This would constitute a de facto tightening, which seems counteractive to the Fed’s objective of being very accommodative at this stage of the cycle.


2. Labor market is still not strong enough. In various communications, the FOMC as well as individual Fed officials have stated that a reduction in the pace of buying is conditional on a “significant improvement in labor market conditions.” Chicago Fed President Charles Evans suggested this past week that a significant improvement means at least six months of job gains in excess of 200,000, confirmed by above-trend GDP growth. We are clearly not there yet, particularly on GDP which is tracking just above 1% for the current quarter. While Evans was expressing his own view, we believe that his position is closer to the Fed’s governors than Bullard’s.


3. Downside risks around the cliff. Moreover, with the fiscal cliff looming, the downside risk on GDP extends into Q1. Given the significant probability of a fiscal contraction, we believe that a smoother path for monetary policy would be to announce a larger program now and scale it back later if necessary, rather than reducing the size of Treasury purchases today only to increase them again in early 2013.


4. FOMC 2013 forecasts could see another downgrade. At the conclusion of next week’s meeting, the FOMC will also publish its new economic projections. The Fed’s 2013 GDP forecast published in September still looks relatively high at 2.5%-3% (see Table 1) and is at risk of being revised lower. Although the revision is unlikely to be large, the direction also argues against scaling back Treasury purchases and could in fact be used as a support for continuing at $45bn/month pace.




Combined with the MBS purchases which are also expected to continue at their current pace, the Fed’s balance sheet is expected to increase by $85bn/month from January onwards. If these run rates are maintained through the end of 2013, as is our central expectation, the Fed’s balance sheet would increase by $1tn over the next 12 months.


In addition to a decision on Treasury purchases, the FOMC also appears to be moving closer to a decision on the so-called “Evans Rule.”



Under the rule, the calendar guidance would be replaced with economic conditions based parameters tied to the level of unemployment and to the outlook for inflation. This has been a topic of extensive discussions by the FOMC and according to Bernanke, the talks have been promising. Evans has recently revised his 7%/3% plan to 6.5%/2.5%, moving closer to Kocherlakota’s proposed thresholds of 5.5%/2.25%. The movement towards the middle suggests that the committee may be getting closer to reaching a compromise. While we cannot exclude the possibility of an announcement today, we believe that the more likely timeframe for adopting quantitative thresholds is Q1 2013.


Even if the rule is not officially announced next week, it may be useful to view the FOMC’s new economic projections in the context of the proposed quantitative thresholds. Of particular interest should be the terminal point of the unemployment rate trajectory and when it crosses the 6.5% threshold.


Based on the September forecasts, the new Evans rule would trigger the first rate hike no sooner than 2015 which is in line with the current calendar guidance.



We don’t expect that the terminal forecast for unemployment will change materially next week as any downward revision to the GDP path will be mitigated by a lower starting point for unemployment.

Source: SocGen, BofAML, and Bloomberg

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GetZeeGold's picture



Extend and infinity.

vast-dom's picture

to think there were once free-ish markets...

TruthInSunshine's picture

Bring in Eric Rosenren, where the moar better-er rule will be ZIRP until 19.5% inflation (according the Hedonic Quality Adjusted CPI; i.e. true 80% inflation) and/or 0.05% unemployment.

derek_vineyard's picture

no wonder hitler rose to power....when the chant of the same bull shit continues, the masses are brainwashed and don't see the  big picture, just the daily idiosyncracies

nope-1004's picture

There will be a Fed QE extension announcement today.  The "managed" charts in gold and silver over the last 2 weeks confirm.  This mornings' action makes it totally obvious.


TruthInSunshine's picture

The Bernank will announce the purchase of an additional 45 billion in unsterilized tnotes, and toss out a bunch of HFT algo stimulating buzzwords and catchphrases about how the Fed is "prepared to do much more if need be."


Alpo for Granny's picture




asteroids's picture

Right you are Granny. The FED has no fear and no shame.

Silver Bug's picture

Regardless of what the final decision is. We know one thing. More money will be printed, and the banks will make out like bandits. QE to infinity.

SheepDog-One's picture

Wow, the imaginary estimate lines look so life-like! 

Now just extend those implied futures guestimates out another couple decades, and then we can get busy adding 20 handles to the SPY today!

Cognitive Dissonance's picture

Looks like green shoots to me bro. Coming up all over the place. :)

<Haven't heard that term in a while.>

Winston Churchill's picture

Green shoots growthing through the foundations, and tarmac.

Elsewhere,not so much.

eclectic syncretist's picture

Cue the imaginary helicopters bitchez!  Gonna look like a scene out of Apocalypse Now, a confetti ticker-tape parade with debt at 0.25% interest fluttering down all over lower Manhattan.  Learn it, like it, love it, live it bitchez!

- Your FedGov

bankonthebust's picture

Getting a degree in Economics was the dumbest thing I've ever done. A degree in theoretical renaissance art would have been more useful.

Cognitive Dissonance's picture

So do we buy the rumor and sell the news or sell the rumor and buy the news?

<To hell with it. I'm just gonna keep buying Gold and Silver.>

Edit - Physical of course.

Boilermaker's picture

I wonder if the equities markets will go up?



LawsofPhysics's picture

All I get from this is a clear signal that the market pricing mechanims is dead and so is the monetary units of exchange underlying the vast majority of all these paper promises.

Canadian Dirtlump's picture

I see blythe took a quick diarrhea dump on the metal to mute the early morning rally. keep trying to put off the inevtiable, you slunt.

catacl1sm's picture

+1 for the new curse word contraction.

buzzsaw99's picture

The bernank rule: keep enriching his friends until monkeys fly out of his own ass.

Cognitive Dissonance's picture

Can't wait until the inflation gorilla tears him a new one.

<Ouch! Hopefully that's gonna leave a (big) mark.>

Kaiser Sousa's picture



there are only 2 forms of real money....Gold and Silver.....

semperfi's picture

How many words today is it going to take to say "moar money printing"?   What's the over/under? 

catacl1sm's picture

I like watching the in person announcements just to see his lip quiver.

adr's picture

Ben must have a really clear crystal ball. I can't get anyone to give me a business forecast past next week.

But really, QE infinity squared will help the economy. Making banks richer and working people poorer has always helped the economy, right? I mean it has always happened that way in history.

PeeramidIdeologies's picture

Persistent this, maintain that, and balance it with bullshit. Perfect really, nobody wins, nobody loses. Unless your greedy or lazy, then you can go fuk yourself. Now if only those Americans would put their guns down, and pick up some garden tools....

Toolshed's picture

"Now if only those Americans would put their guns down, and pick up some garden tools...."

Pffffffft.......get real.

PeeramidIdeologies's picture

All the fukd up fantasies floating around here and mine is the most unrealistic! Haha the free ride is over but not without a shoot out.... How Hollywood...

pods's picture

How funny would it be if the US gov balances it's budget and there is no need for the FED to stimulate MOAR.

Implosion would be epic.


drivenZ's picture

FYI, the fed's holdings of MBS have only increased $40B since September.  Not $80-120B as ZH suggested originally and is still suggesting.

This leads me to believe that the $40B is a gross number and doesnt take into account the maturties in the portfolio or that they aren't buying 40B/month because the language was enough to accomplish what they intended. Either way it seems like ZH is overstating the increase in the balance sheet.