As soon as the much-weaker-than-expected GDP print hit the tape this morning, precious metals began to rise. Led by Silver, it appears the physical demand of recent weeks is creeping into the reality of prices (suppressed or otherwise) as bad is good enough for moar help from Ben and his buddies. The upward move in the PMs is as good a predictor of what to expect (i.e., not even a hint of tightening) as the sell-side crew, which is expecting merely another boring FOMC statement.
Via Goldman Sachs,
- After substantial policy changes announced at the December FOMC meeting - including a shift to outcome-based forward guidance and the introduction of open-ended Treasury purchases - the January meeting will likely be relatively uneventful.
- We expect few changes to the statement, with the economic assessment relatively unchanged. Any changes to the language around Treasury and MBS purchases may be important clues about future balance sheet policy.
- With 4 new voters for 2013, we see some risk that St. Louis Fed President Bullard or Kansas City Fed President George will dissent, although we do not see this as a foregone conclusion.
Following the substantial policy changes announced in December - including the shift to outcome-based forward guidance and the introduction of open-ended Treasury purchases - the January meeting will likely be relatively uneventful. Although data surprises according to our US-MAP have on net been negative over the inter-meeting period, we expect few changes to the economic assessment.
Overall, the data appears consistent with a modestly below-trend rate of GDP growth heading into Q1, while inflationary pressures remain very subdued. In terms of specific changes to the statement language, we expect that:
- the reference to "weather-related disruptions" (i.e. Hurricane Sandy) will be removed,
- the characterization of business fixed investment may be improved slightly, and
- the statement that "the Committee views these [outcome-based] thresholds as consistent with its earlier date-based guidance" will be removed.
At some point, strains in global financial markets will no longer merit mention as presenting "significant risks to the economic outlook"—which has been included in the statement since September 2011— especially in light of the substantial easing in financial conditions which occurred since late December and the generally better state of financial conditions relative to that seen the last time the language was adjusted. However, we think the Committee will continue to err on the side of caution and retain some version of this language.
The statement will probably not "push back" on the markets' more hawkish read on the December FOMC minutes, which noted that several members favored ending securities purchases well before the end of 2013. Although we believe that none of the FOMC leadership fell into this group, the risk-neutral market-implied path of the fed funds rate rose since the December FOMC (Exhibit 1), while longer-dated Treasury yields increased by around 30 basis points, consistent with reduced expectations for the ultimate stock of QE purchases. While the minutes will probably provide more forward looking color, any changes to the language around the Treasury or MBS purchases programs may provide important clues about future balance sheet policy. With Treasury purchases under the new regime already underway, the statement that Treasury purchases would "initially" occur at a pace of $45 billion per month will have to be adjusted. If "initially" is replaced with another modifier such as "at the present time" rather than deleted, it would suggest downside risks to the size of the Treasury program later this year. While we believe that QE thresholds may be announced at some point this year, we would be very surprised to see them at the January meeting.
The January meeting will also welcome a new crop of regional Fed presidents as FOMC voters; James Bullard (St. Louis), Charles Evans (Chicago), Esther George (Kansas City), and Eric Rosengren (Boston) will replace Jeffrey Lacker (Richmond), Dennis Lockhart (Atlanta), Sandra Pianalto (Cleveland), and John Williams (San Francisco).
(Via Bloomberg Briefs)
Both Evans and Rosengren have been known for dovish views in recent years, as Evans was the first Fed official to propose outcome-based thresholds for the forward guidance (the "Evans rule"), and Rosengren suggesting a similar policy for QE. On the other hand, both Bullard and George have made more hawkish public statements in recent months, with Bullard noting that he would have preferred a smaller monthly rate of QE purchases (although supporting the program in concept), and George focusing on the role that monetary policy may play in creating financial imbalances.
(Via Bloomberg Briefs)
Despite this, we think there is at least a 50/50 probability of no dissents at the January meeting. The risk to this view is the considerable institutional momentum behind dissent at the Kansas City Fed, as their board of directors has consistently voted for an increase in the discount rate to 1%, and George's predecessor opposed every FOMC decision when he last voted during 2010.
In addition to the FOMC statement, the Fed will publish its annual Longer-run Goals and Policy Strategy document. This is essentially a specific statement of the Committee's interpretation of its monetary policy mandate, which is described only in general terms in the Federal Reserve Act. Most notably, the Fed made explicit last year that it sees 2% inflation over the longer-run (as measured by the headline PCE price index) as most consistent with its statutory mandate. We expect few or no changes to this statement relative to last year.
However, in light of the change to outcome-based thresholds for the forward guidance, the strong statement that "it would not be appropriate to specify a fixed goal for employment" does seem a bit dissonant, something alluded to in the December minutes as well. More generally, the statement of Longer-run Goals and Policy Strategy may be amended slightly to reflect recent innovations to communications policy.