Goldman Previews The Fed's Statement, Plays Down Expectations Of A "Dovish Surprise"

Tyler Durden's picture

As widely expected by Zero Hedge, barely a few months after the arrival of former Goldmanite Mario Draghi to head ECB, the ECB's balance sheet exploded by nearly $1 trillion. Naturally, such is the way of central banks infiltrated by tentacles of the squid: no surprises. Which brings us to the first Fed meeting of 2012 and its public manifestation: the FOMC's January 25 statement. As is well known, while the Goldman addition to the ECB is a recent development, its agent at the Fed, the head of the FRBNY Bill Dudley has been there for a quite a while - in fact ever since the tax-challenged Mike Judge character impersonator left to become Treasury Secretary. As was suggested on Zero Hedge, it was the meetings of Bill Dudley with Goldman's Jan Hatzius at the Pound and Pence, and of course elsewhere but these are the only public recorded ones, that have shaped monetary policy more than anything. In other words, if anyone can predict, not to say define, US monetary policy, it would be Jan Hatzius. Below are his just released "thoughts" on what to expect on Wednesday. What is odd is that whereas a month ago Goldman was convinced that an LSAP version of QE was imminent, now the firm has become substantially less optimistic. Is it time to manage down expectations? To wit: "Given the improvement in the economic indicators and the easing of financial conditions that has occurred in the meantime, we believe it is less central now. While Fed officials are certainly not targeting a tightening of conditions, we doubt that they will "bend over backwards" to deliver a dovish surprise relative to current market expectations." So just how much QE3 is priced in if Goldman is already doing disappointment damage control. Or did Goldman finally wise up and realize that the only effective Fed statement is the one that surprises. So if Goldman does not publicly expect QE3, and we do in fact get a notice thereof, it will have an immediate knee jerk reaction on risk, and of course, Gold. These and many more questions shall be answered at 12:30 pm on Wednesday.

FOMC Preview

  • We expect the inaugural set of FOMC forecasts for the federal funds rate--or more precisely, the projections of the appropriate level by the 17 meeting participants in the Summary of Economic Projections (SEP)--to be clustered around a median of 0.75% by the end of 2014.
  • We believe the committee will eliminate the "mid-2013" rate commitment from the FOMC statement because it is now redundant and potentially confusing. However, this is a fairly close call. It is also possible that the committee will keep this phrase for one last time, in order to avoid sending what would likely be perceived as a hawkish signal before the new framework has been fully explained to the public.
  • It appears that a discussion of the outlook for the Fed balance sheet will not be available until the full SEP is published alongside the FOMC minutes on February 15, although Chairman Bernanke may reveal some of the committee's thinking in the press conference.
  • The committee might also release a statement on its longer-term goals and strategy, which would probably involve adoption of a flexible inflation target coupled with a reinforced commitment to the employment part of the dual mandate. However, it is unclear whether this statement is ready to be published yet.

Q: What will happen on Wednesday?

A: Following its two-day meeting on January 24-25, the Federal Open Market Committee (FOMC) will publish the following:

12:30 pm: The regular FOMC policy statement.

2.00 pm: Materials from the Summary of Economic Projections (SEP). These will include:

1. An expanded version of Table 1 showing the range and central tendency--the range excluding the top 3 and bottom 3 entries--of the 17 FOMC meeting participants' projections for real GDP growth, the unemployment rate, the headline and core PCE price index, and presumably the federal funds rate, by year through the end of 2014 as well as for the "longer term." (There will be no "longer-term" projection for the core PCE index.)

2. The entire distribution of 17 projections (without attribution) for the federal funds rate by year through the end of 2014, as well as the "longer term."

3. The entire distribution of 17 projections (without attribution) for the year of the first rate hike through 2016. Somewhat to our surprise, the template for the projections released on Friday afternoon suggests that the date of the first hike will only be specified in annual terms; we had expected quarterly or at least semiannual information.

2.15 pm: Opening statement for the chairman's press conference.

Q: Will we get a qualitative discussion of the outlook for the Fed balance sheet?

A: Probably not until the full SEP is published on February 15, alongside the FOMC minutes. However, Chairman Bernanke might reveal some of the committee's thinking in the press conference, which is virtually certain to feature questions about the outlook for the balance sheet.

Q: Anything else?

A: The FOMC might also release a statement about its longer-term monetary policy goals and strategy. This would probably involve an explicit--but flexible--inflation target formulated as a headline PCE inflation rate of 2% over the medium term, but with room for significant deviations in the shorter term. We do not view this as a big change relative to the current language about the "mandate-consistent" inflation rate. In order to counteract the impression that this is a "hawkish" shift, we believe the committee would also find a way to strengthen the employment side of the dual mandate, perhaps by talking about a target of zero for the gap between the unemployment rate and its structural level (i.e. the "longer-term" projection in the SEP).

It is clear that some type of statement is in the works. However, we do not know whether it will already be released on Wednesday or at a subsequent meeting. The minutes of the December FOMC meeting were noncommittal on timing, and remarks by some Fed officials in the meantime had pointed to a later date. But an article by Jon Hilsenrath in the Wall Street Journal on Friday suggested that the statement might be ready to go after all.

Q: What will the forecasts show?

A: Our estimates are in Exhibit 1 below:

Exhibit 1: Our Estimates for the Fed's Summary of Economic Projections

The key point is that while we expect the fed funds rate projections to range quite widely, we think that the median participant will project a funds rate of just 0.75% by the end of 2014 (see Sven Jari Stehn, "Forecasting the FOMC's Forecasts," US Economics Analyst, 12/01, January 7, 2012). This would imply that the median participant expects the first rate hike in 2014.

Also, we expect a long-run estimate for the federal funds rate--which may be interpreted as the committee's view of the "neutral" rate--clustered around a median of 4%.

Q: What will the statement show? In particular, will the phrase that "economic conditions…are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013" be retained, expanded, or eliminated?

A: We don't expect significant changes in either the growth or inflation paragraphs of the statement. Although the data have been generally stronger than expected, the basic message of "moderate expansion" still looks appropriate.

However, we expect the committee to eliminate the "mid-2013" phrase. The whole point of the SEP funds rate projections is that they are a better avenue for providing guidance on future policy than the statement, not that the Fed needs an additional avenue for such guidance (see "Why the FOMC Should Forecast Its Own Policy," US Daily, October 24, 2011):

1. They are more informative than the mid-2013 language because they provide an entire path for the funds rate, not just the timing of the first hike.

2. They are more clearly conditional because the funds rate forecasts are published in the same document as the economic forecasts, which makes it very clear that changes in the latter would cause changes in the former.

3. They provide a more natural avenue for acknowledging both uncertainty and disagreement within the committee, without forcing it to settle on the lowest common denominator. This is a key reason why we think that the projections will show the first hike in 2014, while the FOMC statement was only able to promise no hikes before mid-2013. (Of course, Fed officials have said that even the mid-2013 language is not a full commitment; our view is that it is somewhere in between a commitment and a mere forecast.)

In our view, it would be quite problematic to have the SEP projections and the FOMC rate guidance co-exist, as many market participants seem to be expecting. If they are consistent with one another, nothing is gained by retaining both types of guidance. And if they are inconsistent, this could cause great confusion.

Q: But wouldn't an elimination of the mid-2013 language from the statement be viewed as a hawkish signal?

A: We don't think it should be. All else equal, it is true that a date in the statement is more of a commitment than a forecast path in the SEP, as noted above. But all else is not equal; the SEP is very likely to point to a significantly longer period of near-zero rates than the mid-2013 guidance in the statement. And we do not believe that replacing a slightly stronger (but still conditional) commitment not to raise the funds rate until mid-2013 with a slightly weaker commitment not to raise the funds rate until 2014 would be a net tightening; if anything, we would view it as an easing.

That said, there is a timing issue because the FOMC statement is released at 12.30 but the SEP materials do not come out until 2. This could conceivably trigger an adverse market reaction in the short term. We doubt that this looms very large in the minds of Fed officials, but if it is a concern it is possible that the committee will decide to keep the mid-2013 guidance in the statement one last time, and then have the chairman explain in the press conference why it will disappear in the future.

Q: Would an elimination of rate guidance from the statement reduce the chairman's influence?

A: To a degree, yes, because all FOMC meeting participants including the 7 nonvoting presidents--whose views are on average more hawkish and less aligned with the chairman's--will contribute to the forecasts. We flagged this issue in our October 24 piece and suggested one way to address it, namely to distinguish between the projections of voting and nonvoting participants. Judging from the templates for Wednesday's release, however, Fed officials seem to have decided against such a distinction, probably because it would be too divisive.

But we should not forget that the introduction of press conferences has increased the chairman's ability to shape the overall message. If the chairman uses the press conference to shed light on the outlook for the Fed's balance sheet (in advance of the full SEP to be released three weeks later) this will imply a further increase in his ability to shape the message. This puts the partial loss of control over the rate guidance into perspective.

Q: How do your expectations stack up against the market's view?

A: Our estimate of the median funds rate forecast of 0.75 percent at the end of 2014 is in line with current market pricing. However, it is important to remember that the permanent voters generally hold more dovish views than the rotating voters, and that the Fed's funds rate forecasts are likely to be based on somewhat above-consensus views of the economic outlook. Both of these points suggest that the message about the reaction function might look slightly dovish relative to current market pricing.

Against this, however, there are other aspects that might look more hawkish:

1. The "mid-2013" language. The Goldman Sachs US Rates Trading desk conducted a survey of its clients last week in which 82% of respondents indicated that they expect the committee to either retain or expand the "at least mid-2013" commitment in the FOMC statement. In contrast, our expectation ias that they will replace it with the funds rate forecasts. If we are right, some disappointment is certainly possible.

2. The neutral funds rate. We believe the FOMC will show a median estimate of the longer-run funds rate of 4%. In contrast, 72% of survey respondents thought it would be below 4%, and 39% thought it would be below 3.5%. We would be very surprised by such a low number.

3. QE guidance. The Fed seems set to provide less guidance on the outlook for the balance sheet than many market participants are expecting. This may be viewed as a disappointment.

4. The motivation for moving to the new framework. Many market participants seem to believe that the primary motivation is to ease financial conditions. In contrast, our view is that the primary motivation is that Fed officials view monetary policy forecasts as a structural improvement in their communication with the markets and the public. The desire to ease financial conditions probably played a more important role when the move toward the new regime first got underway 3-6 months ago. However, given the improvement in the economic indicators and the easing of financial conditions that has occurred in the meantime, we believe it is less central now. While Fed officials are certainly not targeting a tightening of conditions, we doubt that they will "bend over backwards" to deliver a dovish surprise relative to current market expectations.

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rajat_bhatia's picture

What is this? Is the world economy Bernanke's private playground?

ZeroSpread's picture

Timing, Gentlemen, is a bitch. QE3 is not there YET. Hope and prayer is not the path to money unless you are either the pope or a certain presidential candidate.


Or with the words of the old chipmunk..

Caviar Emptor's picture


DOT: Vehicle miles driven declined again for November 2011, for a cumulutaive total 49 straight months! For 2011 miles driven were -1.4%. 

This is a sign of an economy in depresison. And it's proof that 'fuel efficiency' is not reponsible for delining gasoline sales. 

In the early '80s, miles driven (rolling 12 months) stayed below the previous peak for 39 months. 

Currently miles driven has been below the previous peak for 48 months - and still counting! And not just moving sideways ... the rolling 12 month total is still declining.

HungrySeagull's picture

Our vehicles have driven the same this year, the last year, the year before that etc.

Especially since we changed employment to really local.

Cost of gas doubled and change, we really dont care anymore.


Ask me again at 15 dollar gas and burned gas stations.

Caviar Emptor's picture

Nice going. Too bad the rest of the country is  no longer able to do the same. This kind of "grass roots" in the trenches data is very revealing of economic distress, as shown in the past but on smaller scales. It also shows that there is no sign of "healing" yet. Just paints a picture of distress when placed along side other data like the moribund BDI. In a debt-ridden economy the last thing we need is less transportation

Caviar Emptor's picture

In further confirmatory signs of contracting energy demand (from a global economy in the grips of a biflationary depression):

This year's outlook is grim for the U.S coal industry, which after two years of rising profits has begun closing mines, signaling a new wave of production cutbacks and, possibly, another round of industry consolidation.

chump666's picture

Caviar is on the money.

Markets hate oil/energy inflation, operational costs (mines/industry) blowout etc. 

sitenine's picture

Speaking of both surprise and inflation, China just made a deal with UAE to trade oil for Yuan.

Draw your own conclusions.

Snidley Whipsnae's picture

RE: QE Whatever Number...

But, but, but... Plosser said on Jan 11 that the Fed may need to raise rates by mid 2013.

Of course Plosser is a non voting member of the Philly Fed... a non job, sort of like being Vice POTUS... excepting Cheney, of course.

Perhaps Plosser is the only member of the Fed without access to a telephone ... This could explain why he isn't on the same page with the guys calling the shots at the NY Fed. Or maybe he is just jawboning... or dumb as a sack of hammers... At least Cheney made himself a hero in the eyes of those that believe hunting lawyers should be legal.

falun bong's picture

Don't miss Bill Moyers and David Stockman on the banks: "as a result we get neither capitalism nor democracy"

Ron Paul, bitchez

Snidley Whipsnae's picture

"as a result we get neither capitalism nor democracy"


Correct. Instead we get a poorly managed police state in which those running the machine are paid far more than they are worth; their worth in a republic or democracy being ZERO.

If the azz hats reducing us to serfs want to know how to really lock this joint down they should import some of those formerly employed by the STAZI in East Germany.

After the collapse of the CCCP and the records of the STAZI were examined, it was found that 2/3rds of the citizens were ratting each other out... and that half of the 2/3rds of the rats were lying to the STAZI to put a competitor out of business, get rid of an unwanted mate, or kids ratting out parents that insisted the kids do their homework. What a great system, eh?

Moyers and Stockman ain't seen nothing yet.

Assetman's picture

Dear World -

We will provide you with what ever the hell transparency we want.

And you will like it.


BS Bernanke

HedgeAccordingly's picture

natural gas - perhaps is the new distruption

xamax's picture

Regardless what the Fed's statement is on Wednesday, stocks will (must)  go up !


hotkarlandtheclevelandsteamers's picture

Joe Granville calling for 4k point drop in 2012...a case of the bagholder blues..

Randall Cabot's picture

That was very entertaining. So friday jan 20 was the high? I'll be watching. It doesn't seem that he concerns himself at all with QE and that sort of thing.


Don't fight the Fed Joe Six. 

chump666's picture

He is still sharp for his age, give him a ton of respect for that.  He has called this market top (as have others).

Good on him.

I hope he gets his 4000 wipeout.  A HFT crash might just do it for him

The OBV is one of the best indicators, everyone uses it -  ala dumb money distribution etc

Everybodys All American's picture

Does anyone remember when front running the market was illegal?

rajat_bhatia's picture

Define illegal. a certain Mr Morgan was doing it from the beginning.

blu's picture

Illegal [adjective] 1. Forbidden by law or statute. 2. Contrary to or forbidden by official rules. 3. Any business deal, charter or transaction Mr. Morgan ever consummated or even touched from day one.

UpShotKnotHoleGrable's picture

illegal is such an uncouth word. vile really.  boss tweed rolling.

disabledvet's picture

well he did finance a thing called a "telephone monopoly." nobody knew what "that" was until he made something that would not being competed against. Of course it's a public network now that the government can phone tap at will--and of course as all the "insider traders" who are being thrown in the clink now know the government is doing just that. of course "who wants to front run with the twisted pair" when "cable is so much faster." with the Wall Street Journal bitchen for years about how "internet spying services are so much faster in Korea" (hardy har har!) than they are in "loser America"--how can one argue with front running? (leaving aside the fact that mom said you'll lose your mind if all you do is watch television all day...i mean does anyone do anything anymore?)

Harbanger's picture

If it's undocumented it's not illegal.

disabledvet's picture

try "if you own its yours."

Harbanger's picture

If you're a Vet like me, you know it's yours when you can take it and keep it.  And you know keeping it is often harder than taking it.

Snidley Whipsnae's picture

"try "if you own its yours."


That's what those holding warehouse receipts at MF Global thought.

Perhaps you should ask them what they think now?


DaveyJones's picture

statutes or enforced statutes? I hear there's a difference

Everybodys All American's picture

Well crony capitalism is again live and well thanks to this Justice Department. Anyone that thinks otherwise is perhaps part of the problem.

Snidley Whipsnae's picture

"Well crony capitalism is again live and well thanks to this Justice Department."


Nothing has changed except that the curtain has been pulled back a bit since the wheels are coming off the 'modified' Bretton Woods system of floating fiats. Actually, there was no formal modification... Nixon simply closed the gold window. This current modified BWoods system isn't taught because it was not a concept, invention, plan, theory, idea... nothing. It simply evolved and has been running, more or less, on autopilot since the closing of the gold window.

...and on governments...

Under every form of government the laws are written and enforced by those in power... and, those in power are above the laws that they write, or, they are until they are replaced.

This debate about creating a benign form of government, and if such a creation is possible, was raging between Greek philosophers many hundreds of years BC.

Have governments attitudes toward the governed changed since the debates between Socrates and his contemporaries were on going? The answer can be 'yes' only if you believe that human nature has changed.

Thrasymachu's reply to Socrates...


"the different forms of government make laws democratical, aristo- cratical, tyrannical, with a view to their several interests; and these laws, which are made by them for their own interests, are the justice which they deliver to their subjects, and him who transgresses them they punish as a breaker of the law, and unjust. And that is what I cratical, tyrannical, with a view to their several interests; and these laws, which are made by them for their own interests, are the justice which they deliver to their subjects, and him who transgresses them they punish as a breaker of the law, and unjust. And that is what I mean when I say that in all states there is the same principle of justice, which is the interest of the government; and as the government must be supposed to have power, the only reasonable conclusion is, that everywhere there is one principle of justice, which is the interest of the stronger."
pauhana's picture

No matter how hard one tries, one cannot manufacture growth from thin air, unlike fiat.  With every government facing the reality of less expansion, it is mathematically impossible to increase growth absent demand in the REAL world.  Get ready for the inevitable.  Gold, bitchez!  

dracos_ghost's picture

Forced credit expansion (aka World War) is the last salvo of the Keynsian playbook.

itstippy's picture

" is mathematically impossible to increase growth absent demand in the REAL world."

You've never read any of Lawrence Yun's seminal works on mathematics, have you?


The Big Ching-aso's picture



At the rate things are going, 'Legal Tender' will be replaced with 'Legal Tinder'.


Dr. Engali's picture

Are you referring to the unconstitutional illegal tender we have now?

TooBearish's picture

Joe Grandville should get together with Barton Biggs and see if they can put a complete sentence together without drooling....stoopid old bastards

The Deleuzian's picture

Ya...But you still know what your grandad was trying to tell you...Even if he couldn't spill it out right...

Randall Cabot's picture

Granville is 89 years old, you twit.

The Deleuzian's picture

Here's my two cents for what it's worth...

Equity markets are at such high levels...The algo's don't even believe it with volume where it is...

The real economy keeps drifting lower...Even the Stats guys are having a hard time fudging the data points in their charts and graphs these days...

Retail investors (except the few and proud like ZHer's) have all but disappeared for a myriad of reasons...

The Fed is really caught been Scylla and Charybdis...

On the one hand, the need to QE:

1) Strong dollar bites!!

2) Confidence is slipping/Hiring has hit a wall...again!!

3) Opportunity cost of not 'QEing'...The economy could slip from here...Too late for any monetary gauge and knob twisting as far as they're concerned...

On the other hand...The Fed has taken a lot of criticism from Main street and Washington...Maybe it would be best to stay out of any 'formal' QE...(oil prices, Gold, The Occupy Movement, printing money for banks only etc...)

I personally expect a formal QE to be announced some time in late Q1 or early Q2...Like all Gamblers and Egomaniacs...They can't stay away for long!!!...


disabledvet's picture

and on the other hand "they've just a glob of silver shoved up their ass." diesel went over 4 bucks today. it was 3.79 but a week ago. is there any price of anything that can be believed? and is the United States better off being a net importer of food? as with losing every war on planet earth that would also be another "first" for this regime.

HungrySeagull's picture

No different than waking up post 9-11 nap the same afternoon in a sheltered part of the Midwest and learn that fuel was over 6 dollars.


Good thing we took on our 300 gallons 4 hours before the attacks. That fuel carried us through the next 5 days.

Snidley Whipsnae's picture

Deluzian... If you are going to use Bill Bonner's material you should give him credit.

It's the right thing to do.

I am Jobe's picture

Sucking on each others dick, Fucking GS and Feds.

SolidSnake961's picture

how many layers of reverse psychology has goldman built into their fed view?

blu's picture

You think they want QE because they say it's not coming. But that's exactly what they want you to think! Because they really think it is coming or at least that's what you think they want you to think but they don't think so because you need to think they are thinking what you thought they were not thinking regarding what they thought the last time they told you what they were not really thinking wasn't going to be happening that time when it really did happen.

Hold on everyone -- um -- oh you know what I think my head just exploded.