Will they take it out or leave it in?
The FOMC will convene for their 6-weekly meeting on monetary policy and publish its
statement at 19.15 CET. In January, the FOMC statement didnât contain too many
surprises. The Fed upgraded its eco outlook and unwound its emergency policy
measures further, but confirmed its intention to keep rates very low for an extended
period of time. The dissent of Kansas Fed Hoenig certainly was a surprise. The
statement said: âVoting against the policy action was Thomas M. Hoenig, who believed
that economic and financial conditions had changed sufficiently that the expectation
of exceptionally low levels of the federal funds rate for an extended period was
no longer warranted.â The Minutes of the January FOMC specified that Hoenig was
looking for more policy flexibility by not retaining the extended period of time language
and suggesting the phrase that rates would be low for some time.
Another regional FOMC voter, St-Louis Fed Bullard later on showed overtly sympathy
for the view of Hoenig and while less clearly also governors Lockhart and Evans
seem to favour a change in the wording to give the Fed more flexibility going forward.
Against these voices, most other governors seemed still comfortable by keeping this
language in the statement. So, the debate on the language of the forward-looking
rate guidance will be central at the FOMC meeting. We think there is a real
chance that it will be changed or at least to appease hawks and doves a compromise
is found to change it at the April 27-28 meeting. The January FOMC
Minutes showed large divergences on the issue of potential asset sales. Most participants
judged a future program of gradual asset sales could be helpful in shrinking
the size of the balance sheet and interestingly, several thought it important to begin
the program in the near future and shrink the balance more quickly than could be
achieved by solely redeeming maturing securities.
No decisions were taken though. In the mean time, officials of the influential NY Fed
suggested that the Fed shouldnât actively sell the assets it purchased as an emergency
support measure during the crisis. Maturing assets wouldnât be replaced,
shrinking the pool of assets gradually. We think that the Washington-based Board is
of the same opinion, contrary to a number of regional Fed presidents who want to
start selling assets quite fast. We think that the NY Fed opinion will prevail. Selling
assets might unsettle the mortgage market that is still very weak. The question of
selling assets is not a theoretical one. Indeed, if the Fed doesnât sell assets, it will
have to conduct its policy via its rates (FF, interest paid on excess reserves). If
it does sell assets, the tightening will happen via the longer end of the curve,
allowing the Fed to keep official rates very low for longer. The Fed asset purchase
programme nears completion (end of March) and given the uncertainty surrounding
it, we donât expect the Fed to add to the uncertainty by introducing the perspective
of asset sales.
Concluding, a change in the wording of the FOMC statement might be a further step
in the normalization of policy. It gives the Fed more flexibility and keeps the outlook
on rate hikes in H2 alive, on condition that the economy improves further and the recovery
becomes broad-based and self-supportive. If the change does occur, we expect
the money market and the short end of the bond market to correct, flattening the
bond curve. There have already been some moves towards a faster tightening in recent
weeks. The implied Dec FF rate stands at 0.53% currently versus 0.44% at the
start of the month.
https://multimediafiles.kbcgroup.eu...unrise_market_commentary_0900dfde8028b215.pdf
The FOMC will convene for their 6-weekly meeting on monetary policy and publish its
statement at 19.15 CET. In January, the FOMC statement didnât contain too many
surprises. The Fed upgraded its eco outlook and unwound its emergency policy
measures further, but confirmed its intention to keep rates very low for an extended
period of time. The dissent of Kansas Fed Hoenig certainly was a surprise. The
statement said: âVoting against the policy action was Thomas M. Hoenig, who believed
that economic and financial conditions had changed sufficiently that the expectation
of exceptionally low levels of the federal funds rate for an extended period was
no longer warranted.â The Minutes of the January FOMC specified that Hoenig was
looking for more policy flexibility by not retaining the extended period of time language
and suggesting the phrase that rates would be low for some time.
Another regional FOMC voter, St-Louis Fed Bullard later on showed overtly sympathy
for the view of Hoenig and while less clearly also governors Lockhart and Evans
seem to favour a change in the wording to give the Fed more flexibility going forward.
Against these voices, most other governors seemed still comfortable by keeping this
language in the statement. So, the debate on the language of the forward-looking
rate guidance will be central at the FOMC meeting. We think there is a real
chance that it will be changed or at least to appease hawks and doves a compromise
is found to change it at the April 27-28 meeting. The January FOMC
Minutes showed large divergences on the issue of potential asset sales. Most participants
judged a future program of gradual asset sales could be helpful in shrinking
the size of the balance sheet and interestingly, several thought it important to begin
the program in the near future and shrink the balance more quickly than could be
achieved by solely redeeming maturing securities.
No decisions were taken though. In the mean time, officials of the influential NY Fed
suggested that the Fed shouldnât actively sell the assets it purchased as an emergency
support measure during the crisis. Maturing assets wouldnât be replaced,
shrinking the pool of assets gradually. We think that the Washington-based Board is
of the same opinion, contrary to a number of regional Fed presidents who want to
start selling assets quite fast. We think that the NY Fed opinion will prevail. Selling
assets might unsettle the mortgage market that is still very weak. The question of
selling assets is not a theoretical one. Indeed, if the Fed doesnât sell assets, it will
have to conduct its policy via its rates (FF, interest paid on excess reserves). If
it does sell assets, the tightening will happen via the longer end of the curve,
allowing the Fed to keep official rates very low for longer. The Fed asset purchase
programme nears completion (end of March) and given the uncertainty surrounding
it, we donât expect the Fed to add to the uncertainty by introducing the perspective
of asset sales.
Concluding, a change in the wording of the FOMC statement might be a further step
in the normalization of policy. It gives the Fed more flexibility and keeps the outlook
on rate hikes in H2 alive, on condition that the economy improves further and the recovery
becomes broad-based and self-supportive. If the change does occur, we expect
the money market and the short end of the bond market to correct, flattening the
bond curve. There have already been some moves towards a faster tightening in recent
weeks. The implied Dec FF rate stands at 0.53% currently versus 0.44% at the
start of the month.
https://multimediafiles.kbcgroup.eu...unrise_market_commentary_0900dfde8028b215.pdf