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Four Key Questions Ahead Of The FOMC Minutes

Tyler Durden's picture




 

Today's release of the FOMC's minutes should be helpful in gauging the near-term monetary policy outlook. Goldman's Jan Hatzius (who just cut his Q2 GDP outlook to a way below consensus +1.3%) believes they will confirm his expectations, for the July 31-August 1 meeting, of an extension of forward rates guidance to 'mid-2015', but no move to further asset purchases yet (not expecting NEW QE until late 2012/early 2013). In the minutes, Hatzius notes four specific issues to focus on: how many FOMC members expect further eventual easing, and in what form; how close the committee was to either doing more or less than Twist 2 at the June meeting; how much discussion there was of qualitative changes in the forward guidance; and how much more negative the Fed staff has become about the economic outlook. In other words, the minutes may provide more information about whether the weak data that have arrived since June 20 - another subpar payroll gain of just 80,000 and sharp declines in high-profile business surveys such as the manufacturing ISM and the Philly Fed - are likely to be sufficient to trigger additional moves.

 

Goldman Sachs: FOMC Minutes Preview - How Close?

The minutes of the June 19-20 Federal Open Market Committee (FOMC) meeting and the accompanying Summary of Economic Projections (SEP) are likely to answer some important open questions about the committee's willingness to provide additional monetary policy accommodation over the next few months, following the turn to "Twist 2" at the last meeting. This information will be particularly useful for gauging the near-term policy outlook because there is not much new information about the economy on the calendar before August 1.

We will be looking for answers to the following specific questions:

1. How many FOMC members (voters and nonvoters) have incorporated additional balance sheet action in their baseline for the economy, and how many view such action as "possible"? Answers to these questions will appear in two parts of the documents released on Wednesday. The expectations of the 12 voting committee members will be summarized in the minutes under the headline Committee Policy Action, while the expectations of the full list of 19 meeting participants will be summarized in the SEP. In the April minutes, no voting members had incorporated additional easing (which presumably included both balance sheet action and communication) into their baseline outlook, although "several" thought that it could become necessary if the growth and/or inflation surprised on the downside. In addition, the SEP revealed that one participant--probably Boston Fed President Rosengren--was looking for additional balance sheet action in his baseline outlook, and "some" thought balance sheet action could become necessary.

 

Now that the committee decided to ease in June, we expect the June minutes and SEP to reveal an increase in the willingness to supplement this move with further easing. Our best guess is that the minutes will reveal that "a few" voting members had incorporated further eventual easing into their baseline outlook and "others" indicated openness to further easing. We also expect the SEP to reveal similar views among the broader group of voting and nonvoting participants (though perhaps with an indication that the numbers are a bit larger). This would be similar to the language used at the January 24-25 meeting.

 

2. Was the committee's decision to extend Operation Twist a close call, and in which direction? Prior to the June meeting, the forecasts in the market ran the gamut from no easing to balance sheet expansion with mortgage purchases. In the end, the committee chose to extend Operation Twist, though with a larger duration removal than expected by most forecasters in the twist extension camp prior to the meeting ($300bn of 10-year equivalents vs. expectations of $150-$200bn). The discussion under the headline Committee Policy Action should provide important insight on how close the committee was to doing more, which in turn would provide hints as to how much new information may be needed in order to see additional easing on August 1. Of course, it is also possible that the committee was "grudging" in deciding on Twist 2, which would at the margin have the opposite implication.

 

3. How much discussion was there about qualitative changes in the forward guidance? One argument against our expectation that the guidance will be pushed out to mid-2015 on August 1 is that Fed officials may be mulling more fundamental changes in the form in which it provides guidance to future monetary policy, that deciding on these changes would take more time, and that they may not want to make a change in the date-based guidance for just a short interim period. In the April minutes, there was a--sparsely described--staff presentation on "monetary policy under alternative scenarios" which suggested that the committee may want to publish some information about its reaction function (or the individual reaction functions of the members/participants) with respect to changes in the economic outlook. Some market participants believe that forward guidance will ultimately be provided in reaction function terms, as opposed to the current date-based form; in fact, some of the "unconventional unconventional" policy options that we have discussed in past research is just a particularly forceful version of this approach. However, we suspect the committee is not ready for such a fundamental shift and expect the date-based guidance to be retained (though extended) in the near term.

 

4. How much more negative about the economy has the staff become? At the April meeting, the discussion under the heading Staff Economic Outlook revealed that revealed slight upward revisions to the staff's growth and inflation forecasts from the March meeting. The staff's absolute forecasts are harder to discern from the purely qualitative discussion, but we suspect that the discussion in the April minutes of "accelerat[ing]" growth and "decreas[ing] slack" will be downgraded somewhat in the June minutes. Given the importance of the staff forecast for decision making among the Fed leadership, sharp downgrades in the language (and thus presumably the quantitative forecast) would make additional easing in the near term more likely. The description of the inflation outlook will also be interesting given the sharp drop in energy prices, headline inflation and some measures of underlying price pressures since April; big downgrades to the inflation outlook would likewise support the case for more easing.

The key way in which the minutes could shift our assessment is by clarifying how willing Fed officials appeared, given the information set available as of June 20, to supplement Twist 2 with further easing moves in the near term. In other words, the minutes may provide more information about whether the weak data that have arrived since June 20--another subpar payroll gain of just 80,000 and sharp declines in high-profile business surveys such as the manufacturing ISM and the Philly Fed--are likely to be sufficient to trigger additional moves.

 

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Wed, 07/11/2012 - 10:49 | 2605996 derek_vineyard
derek_vineyard's picture

question 5:   what is on the luncheon menu?

Wed, 07/11/2012 - 10:53 | 2606009 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Qyestion #1:  How to get away from relying on the Fed and its Centrally Planned Market?

Answer:  This Friday, the 13th, take back the money supply, bomb their Fiat sand castle, and....

Buy Silver!!

Wed, 07/11/2012 - 10:55 | 2606021 King_of_simpletons
King_of_simpletons's picture

Just one question is needed:

1. Are you guys retarded ?

Wed, 07/11/2012 - 10:53 | 2606010 Dr. Richard Head
Dr. Richard Head's picture

Serf and Turf

Wed, 07/11/2012 - 10:54 | 2606015 Sudden Debt
Sudden Debt's picture

Roasted Bald Eagles!!!

Wed, 07/11/2012 - 10:54 | 2606016 Roy Bush
Roy Bush's picture

question 6: where is the after meeting Tulmud reading?

Wed, 07/11/2012 - 10:49 | 2605997 mrktwtch2
mrktwtch2's picture

and most important of all what are the kardashians doing this week..lol

Wed, 07/11/2012 - 10:50 | 2605998 SeverinSlade
SeverinSlade's picture

More QE on the way?  Uhhhhhhh no.  Not with the S&P at 1340.

Wed, 07/11/2012 - 10:55 | 2606019 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The stimulus of POMO and OT2 continue.  If we cunt the continuation of market operations after they were suppossed to end, considering they extended all market operations, we are now on QE 9 or something.

QE has never ended.

Wed, 07/11/2012 - 11:46 | 2606234 Nobody For President
Nobody For President's picture

Ah, LH, how the hell we supposed to do that:

" If we cunt the continuation of market operations after they were suppossed to end,"

Kinds of sounds like fun though...

Wed, 07/11/2012 - 11:09 | 2606095 Randall Cabot
Randall Cabot's picture

Tell that to the BTFDshits.

Wed, 07/11/2012 - 10:51 | 2606001 kito
kito's picture

not expecting NEW QE until late 2012/early 2013....

even tyler finally learned ;)...........................

Wed, 07/11/2012 - 10:53 | 2606011 RobotTrader
RobotTrader's picture

FOMC is so predictable.  Here is what is going to come out of Ben's Pie-Hole:

 

1) Economy is still weak, the Fed is ready to take additional measures if necessary

2) Commodity inflation no longer as large of a threat, but the Fed stands viligant to fight inflation at all costs

3) More easing might be necessary later this year, but not now

4) Lower oil prices could benefit the consumer, but jobs remain weak

5) Deficits must be managed at some point, but not now, wait until the economy recovers

 

Result??

1) Stocks soar

2) Bonds soar

3) Commodities dumped

4) Euro dumped

5) Another new high in the USDX

Wed, 07/11/2012 - 10:57 | 2606034 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Stocks soar: Yeah because DJ 12,600 is soo high

Bonds soar:  Negative nominal rates?  lol

Commodities dumped:  Yeah because $85 oil and $1600 gold and $27 silver is such a dump

Euro dumped:  King Dollar!

High for the Dollar:  Bernanke wins!!!!

Wed, 07/11/2012 - 10:55 | 2606018 101 years and c...
101 years and counting's picture

im not reading that. here's what you need to focus on:

$1.6 TRILLION in excess reserves. ie, QE 1 and 2 cash not being used for anything, so why print more??????

Wed, 07/11/2012 - 10:58 | 2606040 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The cash is being used to balance the liabilities of the Fed.

Wed, 07/11/2012 - 11:00 | 2606046 FL_Conservative
FL_Conservative's picture

I'm with you 101 years.  There's been no tangible benefit to any market (outside of the stock market and commodities), so what is the point to printing more?  It's not like banks are lending to anyone.  Why would thay want to knowing that rates will spike once the Fed loses control of the tail.  Talk about monetary masturbation.

Wed, 07/11/2012 - 10:57 | 2606036 Sudden Debt
Sudden Debt's picture

Question 300: Now the Libor scandal is out, how about the option markets that just don't make no sense anymore?!

 

Wed, 07/11/2012 - 10:59 | 2606041 midgetrannyporn
midgetrannyporn's picture

what will the joo bankers do for joo york shitty next? so exciting. :YAWN:

Wed, 07/11/2012 - 10:59 | 2606045 Mr_Wonderful
Mr_Wonderful's picture

The FED is out of ammo which is why it´s been shuffling its portfolio from short to long. It is leveraged 60-1 against its own capital so all it has left is supporting the price of portfolio by record low interest rates. It´s that old kicking the can down the road thing. Hoping that things will somehow muddle through.

Wed, 07/11/2012 - 11:03 | 2606062 sudzee
sudzee's picture

Only way outa this mess is if credit card rates go to NIRP. Everyone could just borrow borrow borrow until his debt pays for itself.

Wed, 07/11/2012 - 11:05 | 2606075 Hype Alert
Hype Alert's picture

Stall and deflect, but dangle the carrot.

 

Just tell us what you told the directors, the S&P trigger point and the target.  Is that too much to ask?

Wed, 07/11/2012 - 11:14 | 2606098 MFL8240
MFL8240's picture

The con show will again decide to juice the market or not with fake money we have no possibility of repaying.  This sytem is laughable. 

Wed, 07/11/2012 - 11:16 | 2606125 Eisenhorn
Eisenhorn's picture

The Fed KNOWS that QE3 is the last arrow in the quiver.  Despite what folks think, QE 4 and on are not going to have any substantial impact, and the Fed knows it.

Thus, they will wait until the last possible moment to expend QE3. 

I would be VERY surprised to see QE3 before we see 1100 on the S&P.  I believe that they will reserve it to preserve the 1000 mark one last time.  One last effort to suspend reality long enough for the central planners to CONTINUE LOOTING THE SYSTEM, which is what this is all about.

I firmly believe these efforts have nothing to do with "saving" the system, but rather extending it long enough for the governments and bankers to prepare for the collapse.

Once the loot has been sufficiently transferred, they will let the balls drop.

I don't know what weapons QE3 will be fought with, but QE4 will be fought with lead and gold.

Wed, 07/11/2012 - 11:19 | 2606131 Roy Bush
Roy Bush's picture

Debt Jubillee is the last arrow in the quiver and something that should begin pronto....oh, and rolling out the gallows too!

Wed, 07/11/2012 - 13:04 | 2606567 eclectic syncretist
eclectic syncretist's picture

Thanks for the excellent points in your post.  It is very clear now to anyone who bothers to honestly consider the matter that QE has not turned the economy around.  It has not lowered unemployment.  It has not stabilized prices.  It has merely dug the hole the economy is in even deeper as GDP spirals further downwards.

They will aim for a managed decay as the best attainable alternative to the sudden collapse that would surely ensue sans their manipulative machinations.  We are turning Japanese in the best case scenario.

Wed, 07/11/2012 - 11:28 | 2606168 Inthemix96
Inthemix96's picture

Could you ask this question as number 5 TD?

Which one of you fuckers IS NOT BENT?

Thanks in advance like.

Wed, 07/11/2012 - 11:38 | 2606204 Memphis10
Memphis10's picture

Hatzius? ehh... Almost every interview I've seen with him he's turned out wrong. Good luck

Wed, 07/11/2012 - 11:50 | 2606246 Nobody For President
Nobody For President's picture

Am I the only one in the crowd to think it very curious that the Fed 'research report' on 'The pre-FOMC announcement S&P drift' was released today?

Or am I just being too cynical?

Wed, 07/11/2012 - 11:53 | 2606266 sbenard
sbenard's picture

Good analysis! Thanks! I'll be watchng for the answers!

Wed, 07/11/2012 - 12:16 | 2606366 GCT
GCT's picture

If QE is going to happen it will not be based on financials and markets.  QE will be based on the Presidential election to get the most impact for the incumbent.  QE has not come because we are not close enough for it to impact anything for re-election.  If QE is too early commodities will rise too soon causing the incumbent to lose for sure.  The crisis is not big enough yet to capitalise on.

The next QE in my mind will only happen because of politics and nothing more.

 

Wed, 07/11/2012 - 12:46 | 2606498 Snakeeyes
Snakeeyes's picture

Both M2 velocity and the 10 year treasury are dropping. It isn't lighting up anything. Banks aren't making real estate loans, just CC.

http://confoundedinterest.wordpress.com/2012/07/11/mortgage-purchase-applications-rise-a-bit-refi-applications-fall-again-hud-secretary-donovan-goes-live/

Do NOT follow this link or you will be banned from the site!