Divyang Shah, Senior IFR Strategist
There was enough of a split and commentary to help support forecasts of an early tapering of QE (Sept) or a later tapering of QE (Dec). What comes across is that the Fed itself understands that it has a communication challenge on its hands with the FOMC deciding to leave it to Bernanke to meet this challenge.
This suggests that what Bernanke said after the FOMC meeting is much more important than subsequent speeches or the FOMC minutes.
There seems to be no doubt that Chairman Bernanke is in the driving seat when it comes to guiding the Fed toward tapering QE.
The minutes show that there was a lack of consensus on policy but most striking is that the Fed is adopting a moving average form of data dependence to policy. The minutes show that the Fed wanted to highlight that the “pace, composition, and extent of asset purchases” would depend on incoming information as well as “cumulative progress” on its objectives since last September. When the June payrolls data is factored in then it seems that we would need a significantly weak payrolls number in the next three months for the Fed not to taper QE at its September meeting.
In order to deal with the communication challenge various options were pursued. The minutes show that there was a discussion on providing forward guidance on asset purchases that took the form of numerical targets for the Fed Funds rate but then others saw disadvantages.
An alternative was to provide an indication to lower the pace of asset purchases (by “some participants”) but even here there was concern over limiting flexibility (by “some other participants”). There was disagreement about whether the post-meeting statement should be used to provide additional information on the committees thinking. After all of this the Committee concluded that “the Chairman, during his post-meeting press conference, should describe a likely path for asset purchases in coming quarters”.
It is thus interesting that the Chairman decided to lay out the Fed’s view on tapering which dissenting Bullard told us that:
1) the Committee authorised “a more elaborate plan for reducing the pace of asset purchases”
2) confirming that this is not just about tapering but about ending QE with the Committee once again authorising the Chairman to “make an announcement of an approximate timeline for reducing the pace of asset purchases to zero” and
3) that the Fed has moved away from actions to meet a “policy objective” to “calendar objectives”.
We must look beyond the various fragmented views in the speeches and FOMC minutes to what Bernanke told us which is that the goal is to end QE in mid-2014. The Fed remains on track to taper QE in September. Bernanke will get a chance to fine-tune market expectations at his testimony to Congress on July 17 and 18.
