Yesterday, the FOMC decided to reduce the pace of its large scale asset purchase program from $85 billion per month to $75 billion per month. The Fed has long wanted to taper its LSAP program and move to forward guidance to normalize policy but the data weren’t strong enough. Ben Bernanke pulled off this transition in masterful fashion, setting the stage for more market upside. Headwinds are building though. Building inventories, earnings disappointments and a lack of wage growth are my principal concerns.
Tag: Ben Bernanke
Below is the full text of a Speech by Federal Reserve Chairman Ben Bernanke on communication and monetary policy that includes his view on the Fed’s large scale asset purchase program. His ideas give greater clarity to how the Fed thinks about its forward guidance policy. Bernanke’s ideas on asset purchases are not consistent with the more limited Fed as conceived of by Philadelphia Fed President Charles Plosser.
Comments by top Federal Reserve officials support the idea that the Fed is going to move away from quantitative easing as a policy tool and lean more heavily on forward guidance. There are a number of reasons for this, not the least of which is political. Comments by Atlanta Fed President Dennis Lockhart in particular suggest that the move away from QE has already been decided. Below are some thoughts on the why, when and how and what this will mean for markets.
Below is the text of a speech delivered on Friday by Federal Reserve Chairman Ben Bernanke on the recent financial crisis and its similarities to financial panics like the Panic of 1907 (which led to the founding of the Federal Reserve in 1913).
Everyone is familiar with the fact that Federal Reserve Chairman Bernanke’s second term as Chairman is drawing to a close. Janet Yellen is widely expected to ultimately be confirmed by the Senate. What is less appreciated is that the Federal Reserve is on the cusp of what may prove to be among the broadest changes in its 100-year old history.
I believe policy makers at the the Federal Reserve have soured on the marginal effectiveness of quantitative easing as a primary tool for monetary policy. As interest rate policy is still not effective with the policy rate at zero, forward guidance will take on a more central role as the Fed tries to bring interest rate policy back to the fore.
A last minute deal was struck that re-opens the US federal government and removes the immediate threat of default, but rather than turn the attention from the US, the focus has shifted from fiscal policy to monetary policy. In particular, the Beige Book yesterday underscored the economic uncertainty sparked by the government shutdown. This coupled with the recent string of private sector data, such as the ADP jobs estimate, ISM, auto sales, some regional Fed surveys and consumer confidence point to some loss of economic momentum. In turn, more investors recognize that the Fed is unlikely to begin any tapering this year.
To put it mildly, the Fed’s dovish surprise has many implications for the market. The first is that the Fed is very concerned about the backup in US rates, and the negative impact on the economy.
– The second major implication is that Fed credibility has taken another leg down
– The December meeting should now be seen as the earliest one possible for tapering
– We think there is a risk that markets get bombarded with conflicting Fed signals in the coming days
– Implications for EM are pretty straightforward over the short-term: buy
As major central bankers meet in Jackson Hole, Wyoming, Bloomberg, Bloomberg Surveillance was talking about who is going to replace Bernanke as the head of the Federal Reserve. I especially like the way that Sallie Krawcheck discusses the Fed selection process in this video. Take a look.
For those who don’t watch these currencies on a daily basis, these sell-offs seem to happen in spurts – almost at random. But there is a pattern here, particularly in the past few months. Investors are dumping these currencies during periods of higher expectations of the Fed’s slowing its securities purchase program. The evidence for the pattern is in the correlation between these exchange rates and the US treasury yields. Since Bernanke’s first comments on slowing the securities program, currency weakness consistently corresponds to higher US yields resulting from sharper taper expectations.
Fred Sheehan provides a compilation of articles and quotes suggesting that the solution to the mortgage problems in the United States bears a striking resemblance to the policies which led to those mortgage problems in the first place.
Within the next few months the Obama administration is expected to announce a nominee for Ben Bernanke’s replacement. Two names have been bounced around recently: Janet Yellen and Larry Summers. According to Google Trends, here is what Google news searches look like over time for these two candidates.