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The Ultimate Guide To December’s FOMC Meeting: Breaking Down The Participants

Tyler Durden's picture




 

Submitted by F.F.Wiley of Cyniconomics blog,

In “Why the Fed Won’t Taper in December,” we pretended to write the first paragraph of the Federal Open Market Committee’s (FOMC) statement for next week’s meeting. By thinking about the likely mix of upgrades and downgrades to its assessment of the economy, which is the crux of that paragraph, we argued that we can find clues to policy decisions. Our results tell us to expect a deferral of the committee’s tentative plans to taper its securities purchase program.

fomc

You may suggest, though, that economic data doesn’t always tell you what the FOMC will do. Because we agree, we’ve also taken a different approach: listening to Fedspeak and working through the math on the committee’s consensus view. This, too, leads us to think there won’t be a taper this month. Here’s our math, starting with the biggest QE supporters and ending with Chairman Bernanke:

 

4 staunch QE cheerleaders

  • Janet Yellen (Governor)
  • Bill Dudley (New York)
  • Eric Rosengren (Boston)
  • Narayana Kocherlakota (Minneapolis)

These four have consistently (or since a dramatic change of thinking in Kocherlakota’s case) advocated the benefits of QE and downplayed the risks. There’s little indication that any of them wants to taper until we have a strong, broad recovery.

5 QE hawks who wanted a taper in September

  • Esther George (Kansas City)
  • Richard Fisher (Dallas)
  • Charles Plosser (Philadelphia)
  • Jeffrey Lacker (Richmond)
  • Sandra Pianalto (Cleveland)

George is the only 2013 voter in this group and cast a dissenting vote in September, as she has all year long. Pianalto hasn’t been as hawkish as the others, but made it known in September that she favored a taper. Fisher and Plosser also discussed their disagreement with the decision not to taper, while Lacker voted against QE3 in 2012 and says he would have tapered “awhile ago.”

All five will surely argue for tapering and may bang their fists clear through the table this time, judging by Fisher’s impassioned speech yesterday. But that’s not enough to change the outcome; this group is no more influential today than it was in September.

2 QE centrists who tell us it’s on the table

  • James Bullard (St. Louis)
  • Dennis Lockhart (Atlanta)

While Bullard and Lockhart supported September’s non-taper, both have speculated about a December taper recently and helped lift expectations that this might be the month. But does that mean they’ll move off the center and play for the hawks? We don’t think so.

Bullard is intently focused on the FOMC’s 2% inflation target and registered his first official dissent in June because he wanted more of a commitment to battle this year’s disinflation. In September, he went so far as to say he wouldn’t support a taper until seeing inflation head back towards the target. He later dropped this condition. Yesterday, he mapped out his final pre-meeting thinking, saying that the FOMC could conceivably begin in December and then “pause tapering” if inflation didn’t pick up.

If you’re anything like us, you’re shaking your head at Bullard’s latest and wondering where this goes next – do we then get a threshold to establish forward guidance for the pause on the taper?  (Remember, we’re talking about a change from 85 to maybe 70 or 75 billion dollars a month on a program that’s into its third trillion; it’s hard not to be cynical.) In any case, we’re guessing the taper/pause taper scenario doesn’t have enough oomph to set the committee on a new course. What it does, though, is tell us that Bullard’s willing to follow Bernanke in either direction.

Lockhart also recently tweaked his stance, but marginally. His confidence has grown to the point that he’s “pretty confident” we’ve achieved a sustainable recovery. By our count, though, each of his hints that we no longer need as much QE are typically matched by about two caveats. He stresses uncertainties and recently downplayed the information in both November’s strong jobs report and the inventory-distorted Q3 GDP report.

What’s more, one of his conditions for a taper is to be “quite confident” that the economy’s on the right track. We didn’t check a dictionary for this, but we think that “quite confident” lies a few conviction units beyond “pretty confident.” Overall, Lockhart sounds like someone who, like Bullard, wants to retain flexibility.

5 QE centrists and doves who supported September’s non-taper

  • Daniel Tarullo (Governor)
  • Jeremy Stein (Governor)
  • Jerome Powell (Governor)
  • Charles Evans (Chicago)
  • John Williams (San Francisco)

Although Evans and Williams are known as doves, both endorsed Bernanke’s June message about the case for a late 2013 tapering, while Evans even said he was willing to “be persuaded” to taper in September. Stein and Powell were both “comfortable” with a September taper. But Evans, Stein and Powell all voted for the non-taper, as did Tarullo. Williams didn’t have a vote but supported the decision.

Like Bullard and Lockhart, this group is unlikely to produce a new QE hawk. Evans says he’s “open-minded” but prefers to wait. Williams needs to be “completely confident” of the economy’s track, which we’re thinking might equal the sum of “pretty confident” and “quite confident.” Powell conditions the taper on strengthening demand, and we’ve seen just the opposite in reports such as last week’s GDP release.

Stein is likely to remain “comfortable” with an immediate taper and probably prefers to see this happen. He may be the biggest wild card of the bunch. Up until now, though, he’s been more focused on process and communication than which month the taper begins, which he argues isn’t especially important. Without evidence to suggest a change in thinking, we have to conclude he’s an unlikely character to push the decision in either direction.

Tarullo is the quietest of the Governors when it comes to monetary policy, due to his bigger role leading the Fed’s bank supervision and regulatory efforts. That said, he’s a firm QE believer with a dovish record and stresses the data dependency of a taper.

1 lame duck chairman

  • Ben Bernanke

The bottom line is that no-one seems to have jumped with both feet from September’s non-taper camp to December’s taper camp, suggesting that Bernanke won’t be forced into a move. On the other hand, the majority of the committee would line up behind him if he genuinely wanted to taper. The five QE hawks and Stein wouldn’t need convincing, and at least four others (Bullard, LockhartPowell and Evans) seem willing to defer to the chairman.

In other words, it really comes down to Bernanke. In June, he announced there would probably be a tapering later this year. December is his last chance to make good on that prediction. We doubt he will, though, for several reasons.

First, Bernanke never attaches much importance to QE’s risks and side effects. His argument that QE is relatively harmless might make you wonder why he wants to wind it down. He may have fully expected the economy to strengthen more than it has and predicted the taper on that basis. Alternatively, he may have been trying to hold the committee together by moving slightly toward the hawks and against his own biases. There are other possible reasons as well, such as concerns about collateral shortages. But whether Bernanke’s motives were economic, political, technical, or all of the above, words and actions are two completely different things. You might think of that June prediction as being similar to the New Year’s resolutions you’ll soon be making. They’ll sound great on January 1, but six months later? Not so much.

Second, other board members have already backed off the warning to expect a tapering this year. Take Evans and Williams, for example. Their recent comments suggest they’re not yet ready, and they certainly don’t feel locked in by earlier statements. With these ideological allies having already abandoned their resolutions, it’s easier for Bernanke to follow suit.

Finally, there’s another 2014 consideration that’s more than just a resolution: the fact that Bernanke won’t be part of the next meeting while Yellen takes the chair. It would be bad manners to begin the taper without Yellen being fully on board, but she just doesn’t seem interested. Recall that her nomination came through just one week before September’s non-taper. If you’re trying to make sense of this year’s mixed messages, the pending leadership change may be the best explanation of all.

 

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Tue, 12/10/2013 - 20:26 | 4234310 Big Ben
Big Ben's picture

In other words, it really comes down to Bernanke.

I don't agree. I think Bernanke will defer to Yellen. It would not make sense for Bernanke to announce a taper in December and then to have Yellen reverse direction at the next meeting. I think there will only be a taper if Yellen wants one.

Tue, 12/10/2013 - 20:33 | 4234328 Muppet Pimp
Muppet Pimp's picture

Keeping with Federal Reserve Tradition and inline with generally sound practice at such a transition, certainly Janet Yellen is already 'at the helm'.  If you know what Janet Yellen wants you know what is going to take place.

Wed, 12/11/2013 - 01:56 | 4235173 Manthong
Manthong's picture

Why does the term "circle jerk" keep coming to mind?

Tue, 12/10/2013 - 20:36 | 4234321 29.5 hours
29.5 hours's picture

 

 

A post analyzing Fed composition is a waste. It is like finding meaning in Congressional vote count projections. These institutions do what they are supposed to do. They act like our enemies because they are our enemies--even if they are composed of "good" "god-fearing" and "right-thinking" people.

 

 

 

Tue, 12/10/2013 - 21:05 | 4234450 Aussiekiwi
Aussiekiwi's picture

Thank God congress is made up of 'good, God fearing. right thinking people', imagine if they were just out to feather their own nests and always voted for whatever either furthered their own ambitions or put money in their pockets, what a mess the US would be then.  

Tue, 12/10/2013 - 20:32 | 4234336 NeedleDickTheBu...
NeedleDickTheBugFucker's picture

NO TAPER EVER!!!!!

- Janet Yellen channeling Joan Crawford -

Tue, 12/10/2013 - 20:41 | 4234369 Pareto
Pareto's picture

Bullard is intently focused on the FOMC’s 2% inflation target

 

.....and 6.5% unemployment - the Phillips curve trade-off.  And this, in my opinion, will never actually happen.  The Phillips curve was pretty much dismantled and put in a box by Lucas (1976) 30 some years ago.  Why do we keep invoking concepts that are inherently and fundamentally wrong.  I can draw you a Phillips curve that is nearly vertical based on the more realistic assumption that people are in the process of deleveraging, or, as Lucas demonstrated, have changed their expectations based on the information available to them.  Under a delveraging scenario, low interest rates are forcing people to actually save more than they ordinarily would because their savings aren't fetching any meaningfull return outside of risk assets like the stock market.  So, a vertical Phillips curve implies that it dont matta what inflation target you pick, the above average unemployment of 7% (as reported by BLS which itself is questionable) will remain. Iin the 70's the target was 6 and 5.  It was a structural problem then, its a structural problem now because the Phillips tradeoff everyone is looking for, won't ever actually materialize.

Tue, 12/10/2013 - 20:45 | 4234382 max2205
max2205's picture

People actually can make a decision? 

Tue, 12/10/2013 - 21:13 | 4234479 TrustWho
TrustWho's picture

You miss the major point:

Yellen has yet to be confirmed by the Senate. Unemployment IS 7%. Defending no reduction in QE will make her confirmation more difficult. The Fed will throw the Republicans a bone with a small taper announcement in December.

Tue, 12/10/2013 - 21:14 | 4234483 TJ Parker
TJ Parker's picture

Of course, the Fed has planned a massive double POMO right after that meeting ....

Tue, 12/10/2013 - 21:44 | 4234606 Captain Willard
Captain Willard's picture

This article is very long but short on useful analysis. It doesn't state who votes this year and doesn't make it clear that the composition of the FOMC will change significantly in January after the usual voting rotation occurs.

In 2014, Cleveland, Dallas, Minneapolis and Philadelphia vote; KC, St Louis, Boston and Chicago leave. The Cleveland voter will be new to the Committee given Pianalto's departure when her successor is nominated; meanwhile she stays. Fisher and Plosser come back to vote, as does Kocherlakota.

So three hawks and one dove come back on the FOMC as voters in January. Why would anyone expect a move in December? It's too much heavy lifting from the hawks' point of view, given that reinforcements are on the way. 

I agree with the many comments that Yellen will get what she wants - at least for awhile. And she doesn't want a taper.

Tue, 12/10/2013 - 21:45 | 4234609 Crawdaddy
Crawdaddy's picture

Not pictured, sitting off camera, in chair 17, is Beelzebub smiling contentedly at the efforts of his minions.

Tue, 12/10/2013 - 21:49 | 4234629 Colonel Klink
Colonel Klink's picture

Nice list of people to see swinging from lamp posts.

Wed, 12/11/2013 - 08:01 | 4235456 honestann
honestann's picture

An experiment implemented as a head-fake?

-----

Perhaps they will:

#1:  Say "taper now", then actually not taper.

#2:  Say "no taper for some time", but very gradually taper.

The point is, see whether the talk of taper has more or less effect than actual taper.

Personally, I don't believe they'll taper.  They are already captured.  And their partners in crime cannot afford to pay higher interest rates on federal borrowing.

So I believe they're stuck, and this article is just pretense.  However, if I am wrong and these yokels are actually serious (and not just pretending in order to manipulate expectations), I would say they will try #1 or #2 to figure out how trapped they really are, and most important, determine whether they are trapped by cash or expectations.  Probable answer: both.

Wed, 12/11/2013 - 09:18 | 4235592 overmedicatedun...
overmedicatedundersexed's picture

the FED is on the up and up..never a whistle blower in it's 100 year history..how many work for the FED and not one speaks evil of it..amazing.

Wed, 12/11/2013 - 11:18 | 4236018 TrustWho
TrustWho's picture

The best execution of faith based doctrine of any institution in human history. The threat and reality of execution (death) has always been a significant element of a successful secrecy policy. How has the Fed been so successful?

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