Divyang Shah, Senior IFR Strategist
In their quest to take the foot off the accelerator and taper QE the Fed has failed to divorce expectations on conventional policy from unconventional policy.
Since Bernanke’s failed attempt at last week’s post-FOMC press conference there have been no fewer than five Fed speakers attempting to point out that the markets have got it wrong with regards to the rate outlook.
Let’s count these speakers:
- 1) there was Dallas Fed Fisher’s “feral hogs” complement to markets for pushing bond yields higher
- 2) NY Fed Dudley’s “quite out of sync” in reference to market expectations of rate hikes
- 3) Fed governor Powell pointing to the rise in yields being “larger” than justified by any “reasonable assessment” of the rate path
- 4) Atlanta Fed Lockhart compared the market reaction as if Bernanke was asking a smoker to go ‘cold turkey’ and
- 5) Fed governor Stein who urged consumers and businesses not to take their cues for the rate path from the market as asset price movements have been larger than justified by what the Fed said.
There is no doubt that more Fed speakers will join the chorus of voices already singing from the same song sheet and calm market fears over the rate path beyond an end to QE. But it’s hard for markets to understand this message as their task is to be forward looking and price in the risks of various scenarios.
Given the basis upon which the Fed expanded its balance sheet the market finds it difficult to believe current reasons to taper/end QE. A simple trend extrapolation of the unemployment rate points to a breach of 6.5% threshold in Q4 2014.
We can believe that the Fed will keep ZIRP and forward guidance in play a lot longer after they have tapered and ended QE.
The Fed has a lot more work to do before it can convince the markets and this will mean providing a much clearer rationale for why they are so keen to taper and end QE which in the words of Fed’s Bullard has become a “calendar objective” as opposed to meeting a “policy objective”.
