Confusion Reigns: 6 Weeks Of Hawkishness And 4 Dovish Expectations For This Week's FOMC

Tyler Durden's picture

In the six weeks since the last FOMC meeting there has been almost uninterrupted relatively 'hawkish' chatter from Fed members. However, the consensus remains convinced there will be no 'Taper' anytime soon - as somewhat evidenced by the following summary of FOMC expectations from Goldman's Jan Hatzius. So the question is - if, based on the 'economy' there is a belief that no Taper will occur - why has the Fed been so 'hawkish'? We suspect, as we have noted numerous times, the decision to 'Taper' (or at least jawbone 'Tapering') is not economically data-driven but more a growing concern over technical impacts on the Treasury (fails and collateral squeezes) and mortgage (non-economic spreads crowding out private money and huge build in convexity) market and the bubble-like rational exuberance across every asset class that they have created.


Six weeks of hawkishness...


Via Goldman Sachs,

In our view it would be risky to deliver a hawkish monetary policy message at a time when growth remains sluggish, inflation continues to trend down and market inflation expectations are dropping sharply. While we do not expect the committee to deviate much from the existing message and keep all options open, we anticipate that Fed officials will, on the margin, try to calm markets at the June 18-19 FOMC meeting.

More specifically, we anticipate the following details at next week’s meeting:

First, we expect that the FOMC statement will show only modest changes, focused on the first paragraph discussing the economy. In particular, we believe that the committee will acknowledge the recent decline in inflation by, for example, stating that “measures of underlying inflation have trended lower in recent months.” A minor downgrade of the description of the housing sector might also be appropriate, changing “strengthened further” to “continued to recover.” But we expect no changes to the current language regarding either asset purchases or interest rate hikes.

Second, we anticipate modest changes to the committee’s growth and inflation forecasts in the Summary of Economic Projections (SEP). The mid-point of the central tendency for 2013 real GDP growth was 2.55% in March. But with Q1 growth of 2.4% and Q2 tracking at 1.8% by our estimates, this forecast would require growth of more than 3% in the second half of the year, which seems a stretch in light of the ongoing drag from fiscal policy. We therefore expect the committee to downgrade its 2013 growth forecast by around ¼ point. The core PCE inflation forecasts also look high. We would expect the committee to reduce its end-2013 core PCE forecast by around ¼ point to 1.3% and possibly take down its 2014 numbers by a tenth too. We do not, however, expect any meaningful changes to the unemployment rate projection or participants’ projections for the funds rate (the “dots”).

The risks to expecting no move in the dots appears evenly balanced: while the participant projecting the first funds rate hike in 2016 might move into 2015, one of the participants projecting the first hike for 2014 might move into 2015. The dots probably warrant more attention than usual to see whether the observed changes in market pricing are mirrored in participants’ views on the appropriate path for the funds rate.

Finally, we expect Chairman Bernanke to strike a generally dovish tone at the post-statement press conference.

  • First, we would expect him to reiterate that the QE tapering decision is data dependent and would expect him to stick to his statement that tapering “in the next few” meetings is possible if “we see continued improvement.”
  • Second, we would expect him to voice concern about low inflation and the drop in breakevens in response to questions about inflation.
  • Third, we believe he might attempt to dissuade markets from frontloading too much of the entire monetary tightening process - not just the end of QE but also the normalization of the funds rate - as soon as the committee considers the first step into that direction. He could do so by stressing - as he has done in the past - that the tapering and funds rate decisions are separate in nature. One possibility of delivering this message - which might come up in the Q&A - would be to raise the possibility of lowering the unemployment threshold from its current level of 6.5%. We do not expect this change to occur at next week’s FOMC meeting, but believe it is a possibility going forward.
  • Fourth, we would expect Chairman Bernanke to indicate that the committee remains open to modifying its exit principles - in particular, to plan holding all securities to maturity instead of selling MBS - but that no decision has been taken yet. Other things to look out for in the Q&A include any comments on the sharp tightening in financial conditions outside the US and any views on MBS vs. Treasury QE. We would expect him to provide a balanced response to the latter, but at the margin to be more sympathetic to MBS purchases.

Our baseline remains that the committee will first reduce the QE pace at the December FOMC meeting.

In other words - confusion reigns, which is a very different regime (no matter what the talking heads attempt to proclaim) than we have experienced for the last 3 years.

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Non Passaran's picture

If they start tapering in Dec, X'mas sales and year-end stockmarket craze won't go too well, so I doubt that will happen. In Q1 they might try and then reverse to double down after all hell breaks loose.

DormRoom's picture

There's an inherent asymmetry to tapering that the Fed cannot control.  People stagger into wages, but exit all at once.  It's economic behaviour seen in a lot of studies.  Even if they say they way will either taper or restart QE depending on economic conditions, investors will still exit, because they are massively overleveraged.  And the possible hot/cold (restart QE/taper) tactic by the Fed isn't supportive of overleveraged strategies.  The ability and ease to overleverage are factors that allow bubbles to grow.  Without continued overleveraging, bubbles can collapse in unexpected ways.


I'm not sure there's been a case in all of economic history of a soft landing after a bubble.  And we are in a world where most asset classes are in bubbles.  Bubbles created by Central Banks, mind you.

Good luck to Bernanke et al in controlling the multivariant aspects of a soft landing across multiple asset classes, given that there hasn't been a successful occurence in all of economic history.

flacon's picture

"There is never a good time to be responsible and quit the money printing. QE is all good all the time." ~ FOMC

I think I need to buy a gun's picture

this has been the headline for 5 years,,,,,,,,,FORWARD!

Scro's picture

It's all just paper shuffling and it can't last forever.

max2205's picture

Whatever he says it will be bullshit

alphamentalist's picture

I think they are forced to announce a taper of QE this meeting. Assuming Ben shalom is gone in August he has this meeting to make a move and the end of July meeting to clean up any issues. Put that together with the growing list of compelling technical reasons and you get a taper. Market lives to hope otherwise...

caimen garou's picture

confucius say, anyone that listens to goldman sachs gets confused and wakes up with empty pockets!

Yes_Questions's picture



Thought his name was Kermit.

TimmyM's picture

Did any of you yahoos let Wall Street talk you out of your bonds before the global depression?

TimmyM's picture

So I see, presently 4 down arrows. This convinces me that bonds are so hated that I will be buying with both hands on Monday. Funny how people only want to hear what they already believe. What do you fools think the contrarian trades are now? Do any of you have the brains to understand that PMs and T-bonds can both be good deals at the same time?
Are you really so simple minded that you only think inflation makes PMs go up? Will you all come back and kiss my ass when the dollar spikes higher with PMs and bonds?

Go Tribe's picture

Bonds is a pretty wide class. Which ones will you be buying tomorrow?

itstippy's picture

You opened your post with "LOL".  That's an immediate red flag to Zerohedgers that we're dealing with a social-media addled idiot. 

You continue your post with "Did any of you yahoos . . .", and make some vauge, assinine reference to "bonds".  Greek bonds?  U.S.Treasury bonds?  James Bonds?  You don't specify.  Just "bonds".  Our initial impression that you are an idiot is verified.  We down-arrow you.

Then, you come back to protest the down arrows with comments led by:

"What do you fools think . . .", "Do any of you have the brains to understand . . .", and "Are you really so simple minded that . . ."

Fuck off, nitwit.   

TimmyM's picture

If you thought I was some newby, maybe you did not see from my profile how long I have been a participant here.
Most on Wall Street understand the vague term bonds means T- bonds.
The investment world is a cesspool of memes designed to manipulate you.
The present meme you muppets fall for is that there will be a taper and it is bad for bonds. Sorry if I just called you a muppet but I know a lot of investors and they are all muppets-so the odds are high.
I noticed you had nothing of substance to say about the topic.
This was disappointing to me because the abruptness of my language was meant to illicit an on topic response in the spirit of fight club.
Perhaps it is you who are on the wrong website and whom is speaking out of turn?

insanelysane's picture

The only thing that has changed is the the MSM is no longer saying that the market is driven by the great economy and not QE4-eva.  Everyone knows that when the music stops, there are no chairs left in the room. 

put_peter's picture

Ben Shakesmarket:

Scamlet: Act 666.

Ta per or not ta per?

doggis's picture

why does the all the armchair "quarterback" analysis of QE sound like the conversation at a poker table?

karl denniger is perfectly erudite in his analysis on this topic - an analysis which i completly conqur. 

I have cut and pasted his analysis below - [karl with great respect, i have no permission from the author so to do]


There has been much digital ink spilled over QE and interest rates -- the Fed's claim that it is "suppressing" interest rates in the market and will continue to be effective in doing so.

Let's cut the crap -- there is a direct clash between what The Fed wants and what it is doing.

Interest rates are a combination of time value, the risk you will not get paid and inflation.

That is, nobody ever intentionally lends someone money at a loss.

Therefore, if The Fed generates positive inflation by diluting the currency, thereby raising the cost of living for the people and reducing the purchasing power of a unit of currency in relationship to tangible goods and services the interest rate must rise, all other things being equal.

The government, along with others, like low rates because they believe it allows them to borrow "cheaply." But this is a chimera among governments and large corporations, because if the currency is diluted then it is inevitable that as purchasing power is destroyed discretionary income is also reduced and therefore the money that can be either taxed to pay (by government) or spent into the economy to pay (by corporations) is also reduced.

Japan has boxed themselves into this corner -- if rates go up, even a little bit, they're screwed -- their government cannot pay the interest charges as their debt rolls to a higher coupon.

Likewise, if you look at our latest MTS, you find that our interest expense thus far this year has been $76.962 billion.  We are 8 months into the fiscal year (out of 12) so we should be spending about $115 billion this year on public debt interest; with $11.906 trillion outstanding this means we're paying an approximate 1% (!!) interest rate.

If the 13 week T-Bill were to return to a historically-reasonable rate of about 3.5-4%, the lower end of its common range, interest expense would more than triple.

Of course if it were to go back to where it was in the mid to late 1990s, or the 2005-2006 period, or for that matter where it was in the 1980-1990 time frame things would be even more dire.

This hit would not be "slow", "reasonable" or "contained."  It would be instantaneous and destructive.  

Japan is in this hole and the gyrations they are going through in their markets are a consequence of it.  The markets are sussing out that the attempt to prevent this outcome may fail; in particular the collapse may come in the form of a consumer purchasing collapse along with a profit collapse in corporations, which destroys tax revenues as the risk premium on JGBs and inflation premium both rise.  

Such a dislocation is how governments -- and currencies -- fail.

Bernanke knows this.

He also knows that "QE" in fact has historically been associated not with falling rates but rising ones, especially on the long end.

And yet it is rising rates that the government cannot tolerate.

In the end The Fed has two choices -- hit the wall at 100mph and splatter itself and the nation all over the granite or allow deflation to win by ceasing with the monetary games.  In a deflationary environment rates falls because there is a positive carry for holding cash and therefore the rate to borrow is depressed -- naturally.

Yes, it is true that in that environment wages and prices also fall and therefore in nominal terms debts becomes more difficult to pay. 

But this isn't about consumers any more or even businesses.  If you're dumb enough to lever up into an artificially pumped market with extraordinarily high levels of debt and near-zero economic expansion, where there is a strong negative carry in purchasing power, you deserve what you get.

It is the government's ability to finance itself and survive that will win out in the end, and for this reason Bernanke will "taper" -- and ultimately stop.  I've said this since the current programs began and now the  evidence that the end-game is not only upon us but that the inevitable outcome will occur is mounting rapidly.

This is not because Bernanke wants to stop.

It is because he has to.

The math says so, and he knows it.

ebworthen's picture

Denninger is leaving out the "default on your obligations" route, which ultimately may be the only way "out".

Bank bail-in's, asset seizures, Draconian taxation, martial law (once the Elites have offshored what they need).

smartstrike's picture

Why would anyone listen to that guy. He is nothing more than a con. Did he even think it was possible that the FED would go the QE route in the first place?

Antifederalist's picture

Denninger is a mean spirited, insecure prick. On general principle I fade whatever he says.

ebworthen's picture

More jaw-boning to maintain the Banker Bubble that continues to crush Main Street and enrich Wall Street and the Kleptoligarchy.

Bay of Pigs's picture

"In our view it would be risky to deliver a hawkish monetary policy message"

Yes, and $85B a month in QE is hawkish? Just moar useless drivel and propaganda from the masters of it. 

RSloane's picture

I expect nothing more sophisticated than a "look over there, a birdy" in an attempt to divert attention from underlying economic fundamentals and the Fed's persistence in ignoring them.

CrashisOptimistic's picture


You do realize that Denninger just said that by removing a bid from bonds, their price will rise?

Sorry.  No way.

People are just not thinking this through.  QE3 was started in October, 1 month before a close presidential election, risking the Fed's political independence, because of desperation.

That desperation appeared in Q4 GDP of 0% (first look, 0.4% final look).  That 0% was WITH QE.  It would have been horribly worse without.

Q1 bounced from that to 2.4% (more recent look), and the expectation had been 3%, all from inventory bounce.  Also WITH QE.

Q2 projected GDP is now 1.6%, and that's before the primary Sequester furloughs in DoD that start in July.  These pathetic numbers are WITH QE.  How in hell do people think he will taper when he started it all to begin with on evidence of falling GDP?  There's no indication of improved GDP.  QE is the only thing preventing complete collapse.  So he can't stop.

And as for those "technical reasons" people want to float for a required taper, the Fed is not required to pay the price for a bond that the PD paid at auction.  If the PD paid $50 Billion for bonds at auction, and the Fed wants to inject $60B, there is no reason they can't pay the PD $60B.  This story of "running out of bonds to buy" is bogus.

He can inject whatever he wants.  The PD won't complain about the profit.

involuntarilybirthed's picture

But you didn't mention employment and inflation with is their mandate from Congress.  Are they operating independently like most other agency's these days?

CrashisOptimistic's picture

You said something very right and very powerful.


Not unemployment.  That is not a measure of employment.

Employment comes from GDP growth, and so does inflation.

bank guy in Brussels's picture

Confusion at the Fed is nothing new

Greenspan was even confused about what is 'money' (given he abandoned his pro-gold position of the 1960s - 70s)

« We very much believe that, if you have a debased currency, that you will have a debased economy. The difficulty is in defining what part of our liquidity structure is truly money. »

- Alan 'Maestro' Greenspan, 2000

Kreditanstalt's picture

The Fed desperately wants to gradually "prepare" the markets for withdrawal of stimulus.  They want to do this imperceptibly, slowly and stealthily so that markets do not plunge.  They will NOT announce timing and the methods of tapering will not be direct.

The Fed believes only in CONFIDENCE.  They are (misguidedly) assuming that a silent (and unpredictable in timing) taper  will leave spending, borrowing and markets in a "self-sustaining recovery" mode.

RESIST this.  Show the Fed that pigs do not fly: the underlying economy is BROKEN.

CrashisOptimistic's picture

The Fed desperately wants only one thing.

GDP growth something better than pathetic.

That pathetic growth is reliant on the QE they are flowing.  If they cut it, there will be complete collapse.  Not of the market.  The market is not the economy.  The collapse would be of the economy, and then he'd have snipers looking for him at home.

There will be no taper until we see GDP of 3+% for several quarters in a row that drive inflation to 3-4%.

In other words, not for the forseeable future.

Sudden Debt's picture

Europe is going into a full blown deflation spiral you can't believe.
this is not looking good.
gold at 1250 would confirm it. let's see where it goes from here.
and real estate... a nightmare right now. prices are dropping like crazy.

Kreditanstalt's picture

I won't believe there is any serious restructuring or creative destruction going on until I see higher joblessness. 

We DESPERATELY need to see jobs lost in the technical, middle-managerial, skilled trades and government areas - not just in the peasantry.

fijisailor's picture

Yea lets see job losses in critical ifrastructure such as power generation and transmission.  Time to shut it all of and show the bean counters who run the show.

Abi Normal's picture

Where I live, the largest utility has just recently let 600 people go, so it is happening.  they are blaming the moderate weather lol...

gatorengineer's picture

dont know where you are at, but in my world Engineering, and anything non-governmental is NON existant....  yeah the road and bridges guys are kicking ass but other than that engineering is at the low point in my career.  Likewise IT is shot.  Healthcare is cutting costs drasticly the fellows I know in that field are getting squeezed.  Mid level finance guys are getting axed by the hundreds... so..........

Kreditanstalt's picture

The only people making any money where I live are in the oil or forest industries...they leave their wives, families, massive new 350 pickups, boats and toys in town and go off to work, coming back every few weeks.

All these people are in effect subsidised by government grants of access to natural resources and protected against effective competition - and they ALL work for huge companies.  There are no opportunities for small businesses to partake.

The private sector is DEAD here too.

gatorengineer's picture

I think Paper PMs are going to get smacked shortly.... we will see, playing Dust with a 120 price target....

Quinvarius's picture

Hawk speak probably because they are scared shitless that the base money supply is now expanding 3x faster than the Fed balance sheet.  And the velocity is still dropping through the floor, indicating the money is not coming from economic activity.

smartstrike's picture

I remember that back in 2007-2008, Fed members were running interference to what was obvious in hindsight that the Fed would drastically cut interest rates. Yet, Fed members like Poole were bubbling left and right that they were not going to cut interest rates anymore because of the impact on the weakening dollar, inflation fears etc. It was all diversion to fool most of investors especially shorts.

Tombstone's picture

Taper-up may be coming soon to a market near you.  I don't think Benny can quit for a second and will, eventually, have to raise the anti to support a world-wide slowdown.

Atomizer's picture

In case you missed the bulletin..


The interest rate effects of government debt maturity

Federal Reserve purchases of bonds in recent years have meant that a smaller proportion of long-dated government debt has had to be held by other investors (private sector and foreign official institutions). But the US Treasury has been lengthening the maturity of its issuance at the same time. This paper reports estimates of the impact of these policies on long-term rates using an empirical model that builds on Laubach (2009). Lowering the average maturity of US Treasury debt held outside the Federal Reserve by one year is estimated to reduce the five-year forward 10-year yield by between 130 and 150 basis points. Such estimates assume that the decisions of debt managers are largely exogenous to cyclical interest rate developments; but they could be biased upwards if the issuance policies of debt managers are not exogenous but instead respond to interest rates. Central banks will face uncertainty not only about the true magnitude of maturity effects, but also about the size and concentration of interest rate risk exposures in the financial system. Nor do they know what the fiscal authorities and their debt managers will do as long-term rates change.

Lmo Mutton's picture

Yea but where is the script that they are going to give Bernanke?

f16hoser's picture

Who Gives a Shit what these Hamsters have to say? Buy Bullion and sleep well at night. Fuck Them (Banksters). Bernanke is a big fat Nobody! Just like far Right and far Left Politicians. Who are many i might add.

CunnyFunt's picture

There can be no "taper" without risking default.
QE to infinity, bitchez.

TWSceptic's picture

I'm with Peter Schiff on this. That is the fed will not taper because they can't. They can talk about it but can not do it. If they still decide to do it, it'll be obvious to anyone that the economy = QE. Furthermore I think Bernanke wants to leave the fed before TSHTF. He has to know this isn't going to work.

involuntarilybirthed's picture

An orchestrated gift (quid pro quo?) of Volume for the Street. 

Dollar Bill Hiccup's picture

Correction officially over ...