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Confusion Reigns: 6 Weeks Of Hawkishness And 4 Dovish Expectations For This Week's FOMC
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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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.
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.
"There is never a good time to be responsible and quit the money printing. QE is all good all the time." ~ FOMC
this has been the headline for 5 years,,,,,,,,,FORWARD!
It's all just paper shuffling and it can't last forever.
Whatever he says it will be bullshit
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...
confucius say, anyone that listens to goldman sachs gets confused and wakes up with empty pockets!
Thought his name was Kermit.
LOL
Did any of you yahoos let Wall Street talk you out of your bonds before the global depression?
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?
Bonds is a pretty wide class. Which ones will you be buying tomorrow?
10 yr Treas
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.
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?
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.
Ben Shakesmarket:
Scamlet: Act 666.
Ta per or not ta per?
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]
*******************************************************
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).
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?
Denninger is a mean spirited, insecure prick. On general principle I fade whatever he says.
More jaw-boning to maintain the Banker Bubble that continues to crush Main Street and enrich Wall Street and the Kleptoligarchy.
"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.
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.
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.
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?
You said something very right and very powerful.
Employment.
Not unemployment. That is not a measure of employment.
Employment comes from GDP growth, and so does inflation.
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
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.
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.
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.
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.
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.
Where I live, the largest utility has just recently let 600 people go, so it is happening. they are blaming the moderate weather lol...
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..........
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.
I think Paper PMs are going to get smacked shortly.... we will see, playing Dust with a 120 price target....
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.
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.
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.
In case you missed the bulletin..
The interest rate effects of government debt maturity
Yea but where is the script that they are going to give Bernanke?
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.
There can be no "taper" without risking default.
QE to infinity, bitchez.
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.
An orchestrated gift (quid pro quo?) of Volume for the Street.
Correction officially over ...