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Fed's Jeremy Stein Full Speech In Which A "Hypothetical" September Taper Is Announced

Tyler Durden's picture




 

The first of three Fed speeches is out, and as expected, it contains nothing new save for the ongoing barage of stock market battering for daring to sell on last week's Bernanke warnings that the Fed's monthly flow is set to begin tapering in September. It continues to be as if the Fed is shocked to learn that nothing else matters in this "economy" and, of course, "market" than what the Fed will do and say.

Here is the highlight paragraph:

... it often doesn't make sense to try to explain a large movement in asset prices by looking for a correspondingly large change in expectations about economic fundamentals. So while we have seen very significant increases in long-term Treasury yields since the FOMC meeting, I think it is a mistake to infer from these movements that there must have been an equivalently big change in monetary policy fundamentals. Nothing we have said suggests a change in our reaction function for the path of the short-term policy rate, and my sense is that our sharpened guidance on the duration of the asset purchase program also leaves us close to where market expectations--as expressed, for example, in various surveys that we monitor--were beforehand.

And here is why futures are now sliding - nothing quite like a hypothetical assumption in a Fed governor speech:

Both in an effort to make reliable judgments about the state of the economy, as well as to reduce the possibility of an undesirable feedback loop, the best approach is for the Committee to be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting--as salient as these releases may appear to be to market participants. I should emphasize that this would not mean abandoning the premise that the program as a whole should be both data-dependent and forward looking.

Expect similar speeched from the other two Fed members due out later today.

Full speech:

Comments on Monetary Policy

Thank you very much. It's a pleasure for me to be here at the Council on Foreign Relations, and I look forward to our conversation. To get things going, I thought I would start with some brief remarks on the current state of play in monetary policy. As you know, at the Federal Open Market Committee (FOMC) meeting last week, we opted to keep our asset purchase program running at the rate of $85 billion per month. But there has been much discussion about recent changes in our communication, both in the formal FOMC statement, as well as in Chairman Bernanke's post-meeting press conference. I'd like to offer my take on these changes, as well as my thoughts on where we might go from here. But before doing so, let me note that I am speaking for myself, and that my views are not necessarily shared by my colleagues on the FOMC.

It's useful to start by discussing the initial design and conception of this round of asset purchases. Two features of the program are noteworthy. The first is its flow-based, state-contingent nature--the notion that we intend to continue with purchases until the outlook for the labor market has improved substantially in a context of price stability. The second is the fact that--in contrast to our forward guidance for the federal funds rate--we chose at the outset of the program not to articulate what "substantial improvement" means with a specific numerical threshold. So while the program is meant to be data-dependent, we did not spell out the nature of this data-dependence in a formulaic way.

To be clear, I think that this choice made a lot of sense, particularly at the outset of the program. Back in September it would have been hard to predict how long it might take to reach any fixed labor market milestone, and hence how large a balance sheet we would have accumulated along the way to that milestone. Given the uncertainty regarding the costs of an expanding balance sheet, it seemed prudent to preserve some flexibility. Of course, the flip side of this flexibility is that it entailed providing less- concrete information to market participants about our reaction function for asset purchases.

Where do we stand now, nine months into the program? With respect to the economic fundamentals, both the current state of the labor market, as well as the outlook, have improved since September 2012. Back then, the unemployment rate was 8.1percent and nonfarm payrolls were reported to have increased at a monthly rate of 97,000 over the prior six months; today, those figures are 7.6 percent and 194,000, respectively. Back then, FOMC participants were forecasting unemployment rates around 7-3/4 percent and 7 percent for year-end 2013 and 2014, respectively, in our Summary of Economic Projections; as of the June 2013 round, these forecasts have been revised down roughly 1/2 percentage point each. While it is difficult to determine precisely, I believe that our asset purchases since September have supported this improvement. For example, some of the brightest spots in recent months have been sectors that traditionally respond to monetary accommodation, such as housing and autos. Although asset purchases also bring with them various costs and risks--and I have been particularly concerned about risks relating to financial stability--thus far I would judge that they have passed the cost-benefit test.

However, this very progress has brought communications challenges to the fore, since the further down the road we get, the more information the market demands about the conditions that would lead us to reduce and eventually end our purchases. This imperative for clarity provides the backdrop against which our current messaging should be interpreted. In particular, I view Chairman Bernanke's remarks at his press conference--in which he suggested that if the economy progresses generally as we anticipate then the asset purchase program might be expected to wrap up when unemployment falls to the 7 percent range--as an effort to put more specificity around the heretofore less well-defined notion of "substantial progress."

It is important to stress that this added clarity is not a statement of unconditional optimism, nor does it represent a departure from the basic data-dependent philosophy of the asset purchase program. Rather, it involves a subtler change in how data-dependence is implemented--a greater willingness to spell out what the Committee is looking for, as opposed to a "we'll know it when we see it" approach. As time passes and we make progress toward our objectives, the balance of the tradeoff between flexibility and specificity in articulating these objectives shifts. It would have been difficult for the Committee to put forward a 7 percent unemployment goal when the current program started and unemployment was 8.1 percent; this would have involved a lot of uncertainty about the magnitude of asset purchases required to reach this goal. However, as we get closer to our goals, the balance sheet uncertainty becomes more manageable--at the same time that the market's demand for specificity goes up.

In addition to guidance about the ultimate completion of the program, market participants are also eager to know about the conditions that will govern interim adjustments to the pace of purchases. Here too, it makes sense for decisions to be data-dependent. However, a key point is that as we approach an FOMC meeting where an adjustment decision looms, it is appropriate to give relatively heavy weight to the accumulated stock of progress toward our labor market objective and to not be excessively sensitive to the sort of near-term momentum captured by, for example, the last payroll number that comes in just before the meeting.

In part, this principle just reflects sound statistical inference--one doesn't want to put too much weight on one or two noisy observations. But there is more to it than that. Not only do FOMC actions shape market expectations, but the converse is true as well: Market expectations influence FOMC actions. It is difficult for the Committee to take an action at any meeting that is wholly unanticipated because we don't want to create undue market volatility. However, when there is a two-way feedback between financial conditions and FOMC actions, an initial perception that noisy recent data play a central role in the policy process can become somewhat self-fulfilling and can itself be the cause of extraneous volatility in asset prices.

Thus both in an effort to make reliable judgments about the state of the economy, as well as to reduce the possibility of an undesirable feedback loop, the best approach is for the Committee to be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program and will not be unduly influenced by whatever data releases arrive in the few weeks before the meeting--as salient as these releases may appear to be to market participants. I should emphasize that this would not mean abandoning the premise that the program as a whole should be both data-dependent and forward looking. Even if a data release from early September does not exert a strong influence on the decision to make an adjustment at the September meeting, that release will remain relevant for future decisions. If the news is bad, and it is confirmed by further bad news in October and November, this would suggest that the 7 percent unemployment goal is likely to be further away, and the remainder of the program would be extended accordingly.

In sum, I believe that effective communication for us at this stage involves the following key principles: (1) reaffirming the data-dependence of the asset purchase program, (2) giving more clarity on the type of data that will determine the endpoint of the program, as the Chairman did in his discussion of the unemployment goal, and (3) basing interim adjustments to the pace of purchases at any meeting primarily on the accumulated progress toward our goals and not overemphasizing the most recent momentum in the data.

I have been focusing thus far on our efforts to enhance communications about asset purchases. With respect to our guidance on the path of the federal funds rate, we have had explicit links to economic outcomes since last December, and we reaffirmed this guidance at our most recent meeting. Specifically, we continue to have a 6.5 percent unemployment threshold for beginning to consider a first increase in the federal funds rate. As we have emphasized, the threshold nature of this forward guidance embodies further flexibility to react to incoming data. If, for example, inflation readings continue to be on the soft side, we will have greater scope for keeping the funds rate at its effective lower bound even beyond the point when unemployment drops below 6.5percent.

Of course, there are limits to how much even good communication can do to limit market volatility, especially at times like these. At best, we can help market participants to understand how we will make decisions about the policy fundamentals that the FOMC controls--the path of future short-term policy rates and the total stock of long-term securities that we ultimately plan to accumulate via our asset purchases. Yet as research has repeatedly demonstrated, these sorts of fundamentals only explain a small part of the variation in the prices of assets such as equities, long-term Treasury securities, and corporate bonds. The bulk of the variation comes from what finance academics call "changes in discount rates," which is a fancy way of saying the non-fundamental stuff that we don't understand very well--and which can include changes in either investor sentiment or risk aversion, price movements due to forced selling by either levered investors or convexity hedgers, and a variety of other effects that fall under the broad heading of internal market dynamics.

This observation reminds us that it often doesn't make sense to try to explain a large movement in asset prices by looking for a correspondingly large change in expectations about economic fundamentals. So while we have seen very significant increases in long-term Treasury yields since the FOMC meeting, I think it is a mistake to infer from these movements that there must have been an equivalently big change in monetary policy fundamentals. Nothing we have said suggests a change in our reaction function for the path of the short-term policy rate, and my sense is that our sharpened guidance on the duration of the asset purchase program also leaves us close to where market expectations--as expressed, for example, in various surveys that we monitor--were beforehand.

I don't in any way mean to say that the large market movements that we have seen in the past couple of weeks are inconsequential or can be dismissed as mere noise. To the contrary, they potentially have much to teach us about the dynamics of financial markets and how these dynamics are influenced by changes in our communications strategy. My only point is that consumers and businesses who look to asset prices for clues about the future stance of monetary policy should take care not to over-interpret these movements. We have attempted in recent weeks to provide more clarity about the nature of our policy reaction function, but I view the fundamentals of our underlying policy stance as broadly unchanged.

Thank you. I look forward to your questions

 

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Fri, 06/28/2013 - 08:12 | 3702841 ekm
ekm's picture

This is 24 karat propaganda

Fri, 06/28/2013 - 08:36 | 3702905 giggler123
giggler123's picture

Germany want (some of, read as tiny amount) their yellow back, that's Bernanke's bottom.  What you say $300/oz?

Fri, 06/28/2013 - 08:48 | 3702932 SheepDog-One
SheepDog-One's picture

It wouldn't surprise me to see the Fed relentlessly mash gold back to 2001 levels, DOW will be like 18,000 by then, just so they don't have to pay back their gold deliveries. 

Fri, 06/28/2013 - 10:23 | 3703203 eclectic syncretist
eclectic syncretist's picture

When it's this long-winded you know it's complete bullshit.  He could have just said

"We've got the printers running full speed ahead just to keep the economy's head above water, but that's created a bubble in the equity markets that needs to go away, so we're threatening to taper, but since our printers are the source of finances for "free-shit-America", and other countries are either unable or not interested in buying our bonds anymore, we're going to have to keep printing until the whole system collapses.  Thank you, and God Bless America."

Fri, 06/28/2013 - 08:14 | 3702847 blindman
blindman's picture

Grateful Dead - U.S. Blues (Studio Version)
http://www.youtube.com/watch?v=rdPOAhBp2Ag
.
"Red and white, blue suede shoes, I'm Uncle Sam, how do you do?
Gimme five, I'm still alive, ain't no luck, I learned to duck.
Check my pulse, it don't change. Stay seventy-two come shine or rain.
Wave the flag, pop the bag, rock the boat, skin the goat.
Wave that flag, wave it wide and high.
Summertime done, come and gone, my, oh, my.

I'm Uncle Sam, that's who I am; Been hidin' out in a rock and roll band.
Shake the hand that shook the hand of P.T. Barnum and Charlie Chan.
Shine your shoes, light your fuse. Can you use them ol' U.S. Blues?
I'll drink your health, share your wealth, run your life, steal your wife.
Wave that flag, wave it wide and high.
Summertime done, come and gone, my, oh, my.

Back to back chicken shack. Son of a gun, better change your act.
We're all confused, what's to lose? You can call this song the United States Blues.
Wave that flag, wave it wide and high.
Summertime done, come and gone, my, oh, my." r.h.

Fri, 06/28/2013 - 08:16 | 3702854 Unknown Poster
Unknown Poster's picture

Translation of the money paragraph: "It's all manipulated."

Fri, 06/28/2013 - 09:16 | 3703000 CrashisOptimistic
CrashisOptimistic's picture

The translation is we had Hilsenrath start to prepare the public/markets in April.  We made a decision that we needed to cushion the reaction with pre announcement.  Yields rose during all of May, then Bernanke spoke and there was an explosion.

So we had others come out this week and say he was misunderstood and it's not going to happen if the economy is weak.

Then we got a 1.8% number for GDP Wednesday, but because we know we have to stop QE (for reasons not disclosed yet, maybe Treasury issuance scarcity), regardless of the economy we are ignoring that and I'm laying September out for our start point.

 

Fri, 06/28/2013 - 09:30 | 3703052 Unknown Poster
Unknown Poster's picture

Benny is on the way out, and has "some" freedom of action. Consensus seems to be that bubbles are bad yet everybody seems to like them.  His comment that the fiscal policy needs to be improved fell on deaf ears, which IMO is what he really thinks, but he is apuppet and monetizes the debt.

Fri, 06/28/2013 - 08:20 | 3702864 disabledvet
disabledvet's picture

well it ain't like economic fundamentals have changed. "they suck and ate getting worse." having said that I'm still agnostic on the whole Taper Talk because clearly the effect (soaring higher rates, a much slower economy, Super Dollar, deflation) is so obvious. I would argue STRONGLY these price declines are a BAD thing...but this is capitalism and "you can't have it without failure." this time it would appear "Lehman wasn't enough of course" but I've been arguing that for a long time. Stay tuned folks...

Fri, 06/28/2013 - 08:20 | 3702869 blindman
blindman's picture

fraud enabling and laundering is the fed's business.
.
Jimmy Durante - ( If You're ) Young at Heart
http://www.youtube.com/watch?v=p9RchGMmizg

Fri, 06/28/2013 - 08:29 | 3702887 SheepDog-One
SheepDog-One's picture

Ok ok...let's just SAY for the sake of argument....completely hypothetical mind you...that at some point here we start backing off the gas ledal pegged to the floor in 6th gear? JUST SAYIN'....don't get all worried now of course FREE MONEES last forever....but just sayin' and all, how would you all feel about that?

Such fuckin bullshit.

Fri, 06/28/2013 - 08:33 | 3702894 Bearwagon
Bearwagon's picture

Although it admittedly frightens me, I think that I would in the end feel somewhat reliefed.

Fri, 06/28/2013 - 08:32 | 3702891 Don Diego
Don Diego's picture

Stein???....those Germans are surely coping all the top supervisory finance positions.

Fri, 06/28/2013 - 09:04 | 3702964 Againstthelie
Againstthelie's picture

Like Krugman or Blankfein, Shekelblogger?

 

Fri, 06/28/2013 - 11:49 | 3703483 Colonel Klink
Colonel Klink's picture

Don't blame us, the money changers fucked us over in WWI and WWII.  Now they're about to do it a third time.  Apparently no one ever learns.  They're worse than herpes.  They've been coming back since biblical times and they keep screwing society without permission.

Fri, 06/28/2013 - 08:33 | 3702895 MyBrothersKeeper
MyBrothersKeeper's picture

Concise version:  We have been taking a beating from the politicians over how the rise in 10 yr is killing housing and the rise in the 30 year is adding enourmous amounts of interest on debt owed.

Fri, 06/28/2013 - 08:33 | 3702896 SheepDog-One
SheepDog-One's picture

This is so crazy that I had to read carefully twice looking for the 'Sarc off' tag....it's actually serious??

The most priceless shit is in the last paragraph...OMFG 

Fri, 06/28/2013 - 08:36 | 3702904 insanelysane
insanelysane's picture

"I should emphasize that this would not mean abandoning the premise that the program as a whole should be both data-dependent and forward looking."

This line scares the shit out of me.  It implies that there are times when "programs" are not data-dependent and forward looking.

Fri, 06/28/2013 - 08:37 | 3702907 Silverhog
Silverhog's picture

My home price on Zillow just plunged $17,000 in 30 days to the lowest price yet and I live in a nice area of Cape Cod. The strip mall near us with 11 stores in finally empty. Subway hung in there the longest but gave up the ghost recently. Things are going great here!! Thanks, Ben

Fri, 06/28/2013 - 08:41 | 3702915 insanelysane
insanelysane's picture

You forgot to mention that it is raining today.

Fri, 06/28/2013 - 08:42 | 3702917 SheepDog-One
SheepDog-One's picture

DON'T PANIC! See...the FED is just waiting for 'the labor force' to take over producing $85 billion a month from them...the wizards think that's about to happen pretty soon! :D

 

Fri, 06/28/2013 - 08:37 | 3702909 blindman
blindman's picture

one man's debt is another's money in this fractional bullshit
fiat system (law). the greater the suffering and debt the greater
the wealth effect. hmmm? doesn't make any sense ! it is not a
money system. it is a command and control slave based self destructive
fraud and farce mechanism. it wasn't meant to be a money system, it was meant to
replace owning people as slaves and it worked for a while, now it doesn't
for fundamental reasons of cause and effect and structure.

Fri, 06/28/2013 - 08:43 | 3702921 tip e. canoe
tip e. canoe's picture

the greater the suffering and debt the greater the wealth effect. hmmm? doesn't make any sense ! 

indeed, my no eyed friend, indeed.

Fri, 06/28/2013 - 08:48 | 3702931 blindman
blindman's picture

Skeletons from the Closet The Best of Grateful Dead Full Album
http://www.youtube.com/watch?NR=1&v=z6Nm72QQVC0&feature=fvwp
.
cheers mr. tip !

Fri, 06/28/2013 - 08:52 | 3702943 SheepDog-One
SheepDog-One's picture

Yes it's just the last gasps of the new slave system...and apparently they'll wipe out the entire planet trying to keep it running for themselves.

Fri, 06/28/2013 - 08:37 | 3702910 yogibear
yogibear's picture

The Fed is worried the equities market is bubbling over and they want to cool it down a bit so they jawbone  a mild tapering message. 

We all know the Fed cannot stop QE at the current rate.The QE at $85 billion/month is becoming less effective with time.

The Fed will need to increase QE above the $85 billion/month to maintain the economy soon.

Onward to QE 99.

 

Fri, 06/28/2013 - 08:50 | 3702935 Seer
Seer's picture

If this works like everything else, exponentially, then I'm not seeing how we could get to QE 99.  At the rate things are going we're going to reach a point in which there's not enough print/visual space to write the numbers, and with no real way to represent them it'll all collapse- people (especially the media clowns) have to have props to work with!  Imagine trying to have "confidence" when you can't even provide numbers?  People are fixated on numbers.  Truly, if TPTB could pull off keeping "confidence" numbers up without USING numbers, well...

Fri, 06/28/2013 - 08:46 | 3702913 SheepDog-One
SheepDog-One's picture

Since when has it been the Fed central banksters #1 job to run the 'labor market'?  I can't believe ANYONE buys this shit that some 3 piece suit bankers main job is to flood money to themselves waiting for the peasants to start carrying $85 billion/month....WHAT?? How the fuck do they figure 'the labor force' will EVER start generating $85 billion dollars monthly? Has everyone completely lost their fucking minds?

So when he says 'I'll answer your questions now' I'd shoot my hand up and yell 'DESCRIBE how the down and out 'labor force' is EVER going to take the hand-off for $85 billion you're pumping into markets now? 

He'd stand there looking like a fish out of water.

Fri, 06/28/2013 - 08:46 | 3702928 horot
horot's picture

That entire speech would only translated into one thing: The feds are confused.

Fri, 06/28/2013 - 08:57 | 3702948 Seer
Seer's picture

No, they're NOT confused.  The entire game is to NOT give away your true position.  Those holding the BIG hands can easily, and quickly, throttle any move that you're intending to make.  No matter whether benevolent or not, none of it can work to alleviate the woes that exist; and there's no way of knowing whether they know that (and if they did there's no way in hell they're going to say so unless the get-away car is a rocket ship).

Fri, 06/28/2013 - 12:28 | 3703583 Stuck on Zero
Stuck on Zero's picture

The Fed has only one way out: total collapse.  I guess you could call that an exit strategy.

 

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