Fed eyeing exit?

Posted by

If you believe the hype, the Fed is already eying the exit from the quantitative easing programme it initiated at the end of 2012. That is the spin that’s being put on their January meeting minutes. I think it more accurate to say that some at the fed are eyeing the exit. We have been here before, in both 2009 and 2010, and like in those cases the hawks have the market’s ear.

FT Harding writes that the Fed is backing away from asset purchases, and considering signalling that it will be longer before they sell their assets (recall that the Fed thinks it is the stock of assets they hold which signals policy’s stance) as an alternative to further easing.

The Fed minutes show that the duration of QE3 remains hotly disputed on the FOMC, with “several” other participants sticking to open-ended purchases and warning that stopping too early could damage the economy.

But the balance appears to have shifted since December, when the FOMC was evenly split on whether to keep buying assets until the end of the year or stop earlier. In FOMC terms, “a number” is more than “several”.

The FOMC decided not to change its January statement on the costs and benefits of QE3 pending a review of asset purchases at its March meeting.

Several participants said the FOMC should be ready to slow down the pace of asset purchases. Some dovish officials raised the idea that the Fed could hold its portfolio of assets for longer instead of making its balance sheet bigger.

The WSJ’s Hilsenrath hasn’t published on the Fed in some time (most recent relevant articles are: 1, 2, 3). The Journal has someone else on this beat, and they come to similar conclusions to Harding.

Minutes released Wednesday of the Fed’s Jan. 29-30 policy meeting showed that officials worried the central bank’s easy-money policies could lead to instability in financial markets and might be hard to pull back in the future. The Fed plans to evaluate how the programs are doing at its next meeting March 19 and 20.

Several officials said that the Fed should be prepared to vary the pace of its asset purchases, depending on how the economy performs and its analysis of the costs and benefits of the program, according to the minutes.

Some Fed officials suggested the Fed may need to alter its stated course to continue the bond-buying programs until the job market improves “substantially,” a threshold it hasn’t defined.

The minutes also suggest that Fed officials may be rethinking their exit strategy. “[A] number of participants discussed the possibility of providing monetary accommodation by holding securities for a longer period than envisioned in the Committee’s exit principles, either as a supplement to, or a replacement for, asset purchases,” the minutes stated.

There is a great tension in these minutes between the staff (who are the best forecasters and had an ‘essentially unchanged’ medium term growth forecast and a ‘little changed’ inflation forecast), and the participants (where the middle is starting get uncomfortable with bond buying).

The participants are the voters, and in contrast to the staff, some of them saw some improvements on the growth front, and in particular they judged that the downside risks had subsided somewhat. This has not yet spilled into their inflation forecast, as nearly all of them expected inflation at or below the 2% target. A few were worried about longer term inflation risks – but this is always the case.

While there is no doubt that the majority in favour of further asset purchases is being challenged, i do think that the really important voters remain keen to keep the programme going for a time. Public comments suggest that Bernanke’s views are found in another part of these minutes:

A few participants noted examples of past instances in which policymakers had prematurely removed accommodation, with adverse effects on economic growth, employment, and price stability; they also stressed the importance of communicating the Committee’s commitment to main- taining a highly accommodative stance of policy as long as warranted by economic conditions.


  1. this is good news.the Fed is severely distorting asset prices. also looks like CJ is going to be right on the bond market rout he has been calling since late last year. methinks RA did not agree with that call. as noted in post below, CJ has got Oct, Nov, Dec, and Feb RBA right. the bloggers and posters here have got almost all these meetings wrong or right late in the game. we should collectively defer to CJ’s intellect and just accept he’s the smartest kid in the class ;-0

  2. Iron ore prices at $158.90. Chalk that one up to CJ too. RBA and others thought iron ore prices would stay low in Sep….

  3. Good news???

    fiscal policy which was already contractionary in the Us ( as it is here) is set to become more contractionary. monetary policy in the US is far from loose on a forward looking Taylor rule.

    As RA has pointed out here the other commodity prices have not followed.

  4. Why not? While markets are exuberant, it’s a good time to start talking about exiting. It also makes people feel better and more confident about the US economy.

    1. That was another difference between the staff and participants – participants put more weight on financial market developments.

      I think the equity market tank / bond rally shows there are good reasons not to tamper with the policy. A exit plan is a good thing, an exit … Not so much.

      1. Just a knee-jerk reaction, equity markets will not tank, just some profit taking. Maybe a small correction. The doves are still clearly in control at the Fed, I think they’ll let inflation run higher for a bit to balance for the last 5 years, that must be good for shares, since every other asset return is almost null. That’s the question: what happens to all that money invested in very low yielding , “risk-free” assets, once yields start to rise. Volatility will be back. And what’s the future for the USD, when the recovery will start to hopefully get traction? As you know I think AUD and also EUR must fall vs USD (and Renminbi).

  5. Ricardo,
    Nov 2012 : Full-time adult average weekly ordinary time earnings = $ 1 393.00 (TWI @ 77.2)
    Nov 2006 : Full-time adult ordinary time earnings = $ 1 058.90 (TWI @ 64.5)
    30% increase in 6 years. More than 50% if considering TWI.
    IMO it’s too fast and will revert to mean. What do you think?

    1. Hard to see how we can stay competitive excluding the resources sector. The question is, will the other stuff remain strong enough?

      And if not, do we have a long period of low inflation or an AUD tumble.

      I favour a long period of low inflation and a high AUD.

      1. In an interview this week, CBA boss cited a fall in term of trade with a pick up in inflation as the biggest risk. That basically means a fall in commodity prices plus a big fall in AUD. Yes, I agree with this. But I do not think the AUD will tumble, I think we’ll have a longish period of low inflation and low rates and AUD around USD parity, keeping string vs EUR and Yen.

  6. ssec,

    One of the reasons we now rely on the wage price index is because of the inherent problems of the AWE figures.

    Stick with the WPI.

    1. It paints a similar story. Dec 06 = 91.9, Dec 12 = 114.2, a 25% increase in 6 years (instead of 30% with AWE). Weight this with TWI, and it’s exceptional growth.

      What are the problems with AWE , BTW?

  7. RA i just looked over at AFR and Chris Joye called a December rate cut on 14 Nov “Wages data paves way for December cut” and again on 29 Nov “December rate cut firmly in frame”. Not sure what you are talking about! Since he started writing for AFR in Aug 12 Joye has been our best RBA watcher

    1. I spoke to him on the phone right after the November board meeting.

      Anyhow, the point isn’t to guess early – though that is very profitable (and i’d soonest be lucky than clever) – it is to get it right for the right reasons at the right time.

      Chris’s big call is that the bank is too easy. Inflation will tell us the wisdom of that judgement in about a year’s time.

Comments are closed.