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Fed Foward-Guidance Fallacies And The Untenable Status Quo

Tyler Durden's picture




 

The FOMC will probably reduce the pace of its asset purchase program by another $10 billion at its meeting today as it continues to move towards using forward guidance as the primary policy tool. However, as we noted in the case of the Bank of England's Mark Carney, New Fed vice-chair Stan Fischer's skepticism, and even Ben Bernanke, forward guidance is losing its luster (as it works in theory but not in practice). Bloomberg's Joseph Brusuelas warns that given the probable direction of the unemployment rate amid a structurally damaged labor market and disinflation, the Fed faces a dilemma in that the status quo is untenable and may soon be challenged by traders and investors eager to move back toward interest rate and policy normalization. Just as Carney lost his credibility, the Fed risks a lot by reversing its taper today.

Via Bloomberg's Joseph Brusuelas,

The FOMC will probably reduce the pace of its asset purchase program by another $10 billion at its meeting today as it continues to move towards using forward guidance as the primary policy tool. Investors should anticipate another statement that reflects the duality of contemporary monetary policy: the hawkish reduction in asset purchases, which reflects the Fed’s growing confidence in the ability of the economy to sustain growth near the longterm trend of 2.5 percent, coupled with dovish forward guidance designed to keep short-term rates near zero.

Hidden within the occasionally obtuse central banker language is the Fed’s need to protect price stability while acknowledging that the recent decline in the unemployment rate is threatening to prematurely upend the central bank’s forward guidance policy.

Inflation is currently running just below the Fed’s lower boundary of 2 percent. Meanwhile, the decline in the unemployment rate to 6.7 percent, mostly due to individuals leaving the workforce, is threatening to jeopardize the credibility of the new forward guidance policy.

Given the elevated level in the duration of unemployment, historic lows in the labor force participation rate and employment-to-population ratio, the Fed may be unable to deliver maximum sustainable employment anytime soon.

The poor quality of labor gains and stagnant wages are indicative of a mild case of hysteresis in the labor market, or a one-time shock that results in a temporary break.

Making matters worse is the 1.3 million people who had their extended unemployment benefits terminated on Dec. 31 last year. They join the 7 million who have already exited the workforce, placing further downward pressure on the unemployment rate.

Assuming the pre-December 2013 sixmonth average trend in employment holds near 171,000 and the January household estimate captures the exit of those 1.3 million from the workforce, then the unemployment rate may decline as low as 6.5 percent, matching the Fed’s stated unemployment threshold.

If that happens, incoming Fed Chair Janet Yellen will need to use upcoming congressional testimony and Fed speeches to convince investors that a breeching of the threshold will not mean accelerating the central bank’s timetable on raising interest rates.

Given the structural problems in the labor market, the Fed will probably use the next few policy meetings to begin to emphasize the other side of its mandate, price stability, in order to legitimize its preferred “lower for longer” policy stance.

While there will probably be no major policy shifts in the January statement, investors will scrutinize the minutes when they are released on Feb. 20 to see if potential policy changes such as reducing the employment threshold to 6.5 percent or imposing an explicit inflation floor around 1.5 percent were debated.

Given the probable direction of the unemployment rate amid a structurally damaged labor market and disinflation, the Fed faces a dilemma in that the status quo is untenable and may soon be challenged by traders and investors eager to move back toward interest rate and policy normalization.

 

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Wed, 01/29/2014 - 14:50 | 4380707 denverdolomte
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They had credibility prior?

Wed, 01/29/2014 - 15:11 | 4380837 ArkansasAngie
ArkansasAngie's picture

Price stability?

Hahahahahaha

Horse manure.

Wed, 01/29/2014 - 14:55 | 4380715 hedgeless_horseman
hedgeless_horseman's picture

 

 

The FOMC will probably reduce the pace of its asset purchase
program by another $10 billion at its meeting today...

...with the hope that MYRA will fool first-time savers into picking up the slack and buying the nation's debt.

Wed, 01/29/2014 - 14:54 | 4380728 denverdolomte
denverdolomte's picture

Capitol Controls for the uninformed. But at least they now own part of MYRA in the stock markets.

Wed, 01/29/2014 - 14:58 | 4380751 Panem et Circus
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Until of course it becomes mandatory.

Wed, 01/29/2014 - 15:02 | 4380762 hedgeless_horseman
hedgeless_horseman's picture

 

 

Mandatory?

A) saving

B) buying

C) debt

D) picking up slack

E) all of the above

Wed, 01/29/2014 - 15:04 | 4380768 denverdolomte
denverdolomte's picture

If the government is involved is all about the D. Dick moves to Dick people over, thus putting the Dick in the A.

Wed, 01/29/2014 - 15:46 | 4381073 Panem et Circus
Panem et Circus's picture

You missed a few. It bails out big labor with its massive unfounded pension liability problem. It also feeds the beast of Wall Street as surely there will be banker bonuses in exchange for administering the transfer of wealth. All in this is a huge boon to the fascist crony big government types of both the left and rights constituencies.

Wed, 01/29/2014 - 15:08 | 4380801 AngelEyes00
AngelEyes00's picture

Hedgeless H, I was wondering if anyone else was thinking what I was, i.e. Obama's heartfelt offering to 'The People' to buy US bonds for our retirement at a "Decent Return" (which probably means a pittance), was to replace amounts being tapered.  LOL - when the prez has to make a sales pitch to the people for payola, it's reached a point of being desperate and pathetic.

So we are suppose to buy US bonds even though we've lost all our power to lobbyists?  Not me.  I won't do anything to keep this corrupt govt. on its feet.

 

Wed, 01/29/2014 - 15:15 | 4380858 ArkansasAngie
ArkansasAngie's picture

"decent return".  

Come on Pres.  You be the first in line to put your retirement in Myra.

 

Wed, 01/29/2014 - 14:54 | 4380720 SoilMyselfRotten
SoilMyselfRotten's picture

Big movement due to Fed leak in 3,2,1....

Wed, 01/29/2014 - 14:53 | 4380723 RebelDevil
RebelDevil's picture

If the Fed truly fears a crash in stocks, then they'll increase QE past $85Billion/month.
The first round of tapering triggered the EM chaos, so now what?

QE or Crash?

Wed, 01/29/2014 - 14:56 | 4380742 El Vaquero
El Vaquero's picture

I'm guessing equities crash.  That'll send some money into treasuries while the MyRA retirement account theft instruments are being set up. A crash will also give them reason to start herding retirement accounts into MyRAs. 

Wed, 01/29/2014 - 15:01 | 4380756 SAT 800
SAT 800's picture

Obviously I agree with you; as I've said nine times, I'm short the S&P; and of course I'm very relieved and pleased that it didn't go roaring back up to the moon again today; I think it's time for some kind of "re-alingment".

Wed, 01/29/2014 - 15:09 | 4380795 RebelDevil
RebelDevil's picture

This is the big question I'm asking myself now?

What happens when no one wants to sell Treasuries other than the treasury for new issuance, and most want to buy to flee from stocks, or gain more HQC for margin calls?

Did the (now pronouced Dictator) Obama give us the solution last night, by declaring he can do anything (read as spending like crazy) to stimluate the economy?

http://www.zerohedge.com/news/2013-05-01/desperately-seeking-112-trillio...

Wed, 01/29/2014 - 15:16 | 4380866 SAT 800
SAT 800's picture

Are you sure you want to know the answer to this question? Here's the big answer to your big question; buy a big bar of Silver; and do it now.

Wed, 01/29/2014 - 15:53 | 4381124 RebelDevil
RebelDevil's picture

Silver!? - haha but hasn't been used as monetary metal for a hundred years!
It's Gold or Bitcoin when it comes down to escaping fiat and inflation.

Bitcoin will be winner in the US I think, as Gold isn't nearly as popular right now.

Wed, 01/29/2014 - 15:00 | 4380757 Headbanger
Headbanger's picture

And start herding sheeples into FEMAs

Wed, 01/29/2014 - 14:57 | 4380724 Ham-bone
Ham-bone's picture

The Fed's tapering is feeding the defationary monster by not matching all the debt w/ new cash...not sure a replay of '08 is what Janet has in mind?  Unwinding record leverage would leave a lot of casualties real quickly...

Wed, 01/29/2014 - 14:58 | 4380744 RebelDevil
RebelDevil's picture

Your comment goes hand-in-hand with mine above.

Wed, 01/29/2014 - 15:20 | 4380903 AngelEyes00
AngelEyes00's picture

Yeah, in other words the Fed is stuck between tapering to zero and watching these artificial asset bubbles burst, the economy to go into recession and unemployment to explode OR lose all credibility by halting taper, and be forever stuck printing money, which may lead to hyper-inflation.  It's a disaster either way the Fed takes this.

Wed, 01/29/2014 - 14:57 | 4380736 Overfed
Overfed's picture

 

 

"Making matters worse is the 1.3 million people who had their extended unemployment benefits terminated on Dec. 31 last year. They join the 7 million who have already exited the workforce, placing further downward pressure on the unemployment rate."

 

This kind of bullshit just makes me want to go on a killing spree. Exited the workforce? Downward pressure on unemployment? WTF?

Wed, 01/29/2014 - 14:57 | 4380739 ebworthen
ebworthen's picture

What decline in the unemployment rate?

Steve LIESman is going to say something really stupid here in about 3 minutes.

Wed, 01/29/2014 - 14:57 | 4380745 Rathmullan
Rathmullan's picture

It's 1:57 and someone obviously already has the no taper decision info.

Wed, 01/29/2014 - 14:59 | 4380753 ebworthen
ebworthen's picture

Yeah, +25 points on the DOW in four minutes.

Probably CONgress critters, after all, they are all millionaires.

Wed, 01/29/2014 - 15:11 | 4380826 SAT 800
SAT 800's picture

2:07pm and the DOW is down 170pts. Head Fake. Standard Practice.

Wed, 01/29/2014 - 15:02 | 4380760 ebworthen
ebworthen's picture

$10 Billion taper!

Hey assholes!  Why not taper down to 0 you CHICKENS!?!?  5% rates!

C'mon!!!

Wed, 01/29/2014 - 15:02 | 4380764 Jonas Parker
Jonas Parker's picture

"Inflation is currently running just below the Fed’s lower boundary of 2 percent."

What alternate universe are they living in?

"Meanwhile, the decline in the unemployment rate to 6.7 percent, mostly due to individuals leaving the workforce, is threatening to jeopardize the credibility of the new forward guidance policy."

The Fed's grasp of the obvious is underwhelming!

 

What dork writes this tripe anyway?

Wed, 01/29/2014 - 15:06 | 4380793 Dapper Dan
Dapper Dan's picture

interest rate and policy normalization.

What the hell is that?

 

Wed, 01/29/2014 - 15:11 | 4380840 SAT 800
SAT 800's picture

And there goes the stock market; and I don't mean no steenkin Emerges, either, bitchaez, I mean NYC. Gooodbyee !!

Wed, 01/29/2014 - 17:41 | 4381756 Dead Man Walking
Dead Man Walking's picture

"the Fed may be unable to deliver maximum sustainable employment anytime soon." 

No, the Fed can't, but maybe businesses  would hire if you get rid of Obamacare. I see ecomomists speak all the time about the Fed boosting employment, as if their actions create jobs, but they nor the govt have not created a single job.

 

It's all so obvious to small business owners that Obama has screwed up the economy, placing hiring plans on hold, reducing demand, reducing the potential for customer demand.  Obamacare has created such a fundamental cost issue for small businesses that most are going to postpone growth and hiring until well after 2014, when the Obamacare impact is understood.

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