Tag Archives: fomc

Somewhere Ben Bernanke Was Smiling

In the midst of watching both the stock market and the FOMC snippets today, I had to laugh at the twitter backlash that seemed to follow the statement the FOMC Chairman Janet Yellen was making in her first meeting. The FED did what the street seemed to think it would do and cut QE by 10 billion dollars per month, evenly split between mortgage backed securities and treasury bonds. (Business Insider)

It was, in my opinion, a short statement which I am almost positive that Yellen was trying to keep the markets calm with her first FOMC meeting as chair. As she kept talking though, things started to get a little dicey. While investors listened to Yellen speak, their reaction to the seemingly “slightly hawkish” outlook on the federal funds rate the 10 year treasury rate spiked up as did futures for the FFR.

The tone in a WSJ article by Jon Hilsenrath, seemed to take the stance that Ms. Yellen had made a little bit of a rookie mistake here in how she handled the conference and that the markets probably should not worry too much about this. I have written before that I think the rising rate environment is quite good for the economy especially the banking sector which is just once again starting to do more than tread water.

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Yellen tried to make the point that the committee was steadfast on leaving rates low for the foreseeable future but another metric that came out spooked investors as well.

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This dot chart was what really seemed to spook investors in late trading hours and sent both the FFR futures contracts soaring as well as the ten year as I think people underestimated the hawkishness of the FOMC in the short run.

I think it is prudent for everyone to remember though, that Janet Yellen has been a steadfast dove in recent years and that this first news conference needs to be taken with a grain of salt. I do not know if she had any indication as to how the stock market was reacting during her statements, but she did even make a point as to say that she was going to try and make her statements as little of a source of instability as possible. At that point I smiled and realized that Ben Bernanke had to have enjoyed a comment like that as he got hammered throughout the latter parts of his career for supposedly lacking clarity in some of his statements.

I maintain the view that a rising rate environment is a continued sign of the overall health of the economy, even if the weather held things down a bit at the end/beginning of the year. Banks need to be what leads the markets into the next leg up of this long bull market and the rising rates should be a bit of a silencer to the naysayers of the economy overall.

Federal Reserve Poking Game

Several weeks ago I wrote a blog post regarding interest rate and Fed’s next move. According to the Jan 28-29 FOMC meeting statement release, there was a mention of the new threshold on unemployment rate before raising the interest rate. Today, chairwoman Yellen suggests that she would stay on track with the original plan.

Let us wind back just a few weeks. The statistics from the Labor bureau showed that the job market had improve better and faster than had previously expected. Indeed, the job market had consistently done better since October, 2009, lingering around 10% down to 6.7% in this past February, but the output hadn’t been on par with this trend. So, when there was a talk about lowering the unemployment threshold, everyone seemed to be nodding their heads and adjusting their investment accordingly, or rather didn’t make any alterations from their previous holdings. Yellen’s statement today that interest rate may rise in six months time, really shocked the market, especially the treasury bonds. Bonds, which prices are determined by their expected value in 6 months time showed higher yield, signs of volatility in the market. S&P index and house builder index all showed dip signs.

To reiterate what I had said in my last blog post, it is very important for the Federal Reserve to be very clear about what they are going to do. To lay out some example in the past where expectation was important part of the economy, let us go back to 1970’s and 80’s. Although I am not a strong believer of the phillips curve for their meager support from real world data, I think the expectation augmented version of phillips curve rings truth in some sense.
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We start from point A and the Fed uses expansionary monetary policy to ease the credit market, which increase spending in some sense and (according to the theory) raise inflation and reduce unemployment, moving to point B for the short run. Overtime, people associate this only as inflation and re-adjust to point C. Then, we could have the Fed use more expansionary measures to move from point D, raising inflation. But overtime, people re-adjust their expectation again. I could go on, but you get the story.

This in fact might have been the case in 1975 when Paul Volcker assumed office. He changed the Fed’s general policy of interest rate targeting through easy credit rating to inflation targeting.

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We see here, that there is a great hike in inflation in the late 70’s and then a huge drop in early 80’s. I blame this partly because people’s expectation on interest hike due to contractionary monetary policy did not adjust quick enough. People were in some sense spoiled (?) into thinking that easy credit would be granted again, and kept on spending. As hawkish Volcker was, that did not happen, so at the cost of high unemployment, Volcker was able to control inflation.

Now, Yellen has weakened some of the trust that Fed has built up since the time of Volcker. You might compromise into thinking that it is a rookie mistake in publicity, but there is no room for rookie mistakes in institutions like Fed. I am not to judge and say that hike in the interest rate is a bad thing or a good thing in the long run, but I will say that words of Fed should be very carefully thought out and should stick with what the words are saying.

Yellen’s First FOMC

Today, Janet Yellen took part in her first Federal Open Market Committee meeting as the first chairwomen of the Federal Reserve. And, just like every other meeting she emerged after to deliver the news of what the Committee agreed upon. Today, however, the news wasn’t all good. It seems that analysts and investors alike are worried after hearing what the new chairwomen had to say.

One of the announcements pertained to the short term interest rates. On the surface Yellen announced that the FOMC planned to keep on track with Bernake’s plan and keep short term interest rates artificially low well into next year. Analyst might not have been so quick to take her word, and it seems that the common belief is that the Fed is planning to allow these interest rates to rise quicker than announced. To further complicate things the analyst predict that these rate hikes will be more aggressive than originally planned.

The comments that spooked investors, and forced dropping prices in the stock market. Something that can be expected as when short term interest rates are suddenly expected to rise. However by the end of the day the market seemed to make up most of its loses from the announcement.

Another action taken at the meeting was to cut bond buying back another ten billion to $55 Billion. It is apparent that here again Yellen is keeping on course with Bernake. It doesn’t seem the stock market had an immediate reaction to this announcement, but it will be interesting to see their response in time to come. If you view the stock market prices are perceived future gains than one would expect that as Yellen continues on Bernake’s path and doesn’t change it up, the stock market will remain unaffected from the reduction in quantitative easing. In opposition you could look at the percentage by which the Fed is cutting the bond buying program.

Back when reductions started in December, the Fed was purchasing $95 Billion worth of bonds a month. When the began to taper off the quantitative easing strategy they cut back by about 10.5%. Now that they are moving from $65 Billion to $55 Billion they are cutting at a much higher rate, around 15%. If an investor were to look at the future cuts in the buy back program they could anticipate where the “wins” would be in the stock market and create a positive gain from this speculation.

Nothing to out of the normal was announced, but today was definitely a historic day for the Fed and its first official FOMC with a chairwomen.

“Monetary Camels” –President Richard W. Fisher

From my previous blog post, With Great Power Comes with Great Responsibility, I said I would look into President Richard Fisher’s reasons for supporting tapering more than other FOMC members. Before I go into talk about his position about Fed’s policy, I would like to make clear a point that I made from my previous blog. That is, I think the Federal Reserve is not the World Bank. However, some extent, Fed are better off considering others because in the long run, it benefits the U.S. economy.

Changing a gear back to Richard Fisher, I would like to give a brief introduction about him. Richard Fisher is the president of the Federal Reserve Bank of Dallas, and he holds very strong point of views about the Fed, in which he would like to see the Fed’s bond buying program ends “as soon as practicable”. According to the Market Watch report inside the WSJ, Fisher wanted $20 billion taper instead of $10 billion taper on recent FOMC meeting. He is still pleased with Fed’s decision and their direction, but he wanted to see more tapering. Richard Fisher made me very curious about why he holds such a stronger point of view about ending QE than his other colleagues in FOMC. I found some of reasons by reading his 2014 speech, Beer Goggles, Monetary Camels, the Eye of the Needle and the First Law of Holes, which was posted inside of the Federal Reserve Bank of Dallas web page and I was convinced by him all the way.

Today, I want to focus on one point he made. He argues that the U.S. economy already has surpassed its limit of bring more “wealth effect” by injecting more money into the economy. In his speech, I like how he compares the massive quantitative easing to fattening camel to illustrate its difficulty of passing “monetary camel” through “the eye of needle of normalizing monetary policy without creating havoc”.

Fisher has summarized the size of the Fed’s balance sheet, and how it has grew over time since the Sept 2008. Ben Bernanke’s QE started from 2008, since then, Fed bought various assets to lower the interest rates. For example, Fed bought MBS to boost energy in housing markets to start up the stimulus. Next, announced to cut down the fed funds rate to 0 to .25 of 1 percent, thus eventually achieving “zero bound”. Then further purchased longer term Treasuries, MBS, and agency debts to support further interest rate cuts. Fed kept buying long term assets. By end of March 2009, Fed added $2 trillion into their balance sheet. Richard Fisher argues that by this point, Fed already had achieved a base lending rate of 0 to .25 of 1 percent, and he thinks this was more than enough. He believes that if the “wealth effect” had really been working effectively, first $2 trillion balance sheet should have done the same job of putting $ 4 trillion into economy.  Because Fed did not see the outcome as they expected with $2 trillion dollar injection, since 2009, Fed has added $2 trillion more to their balance sheet. This created jumps rather than gradual steady growth in housing, bond and stock markets which can cause more serious problems later on. Thus, he insists to cut back more aggressively. Even further tapering would have been okay because the most of Fed’s long term assets will not mature until next five years, he said.

Next time, I will write about some of difficulties that Fed faces because of this fattening camel of unprecedented quantitative easing and why he said passing through eye of the needle of normalizing monetary policy is not easy.

FOMC Release

Today at 2pm, the Federal Open Market Committee had its first press release of the year. The biggest attention was of course given to the Fed’s next move on the Quantitative Easing. This past week emerging markets had had their fair share of down troughs after China’s Purchasing Managers’ Index (PMI) signaled there is a surprise contraction along with a scare of China’s shadow banking.

The real worry that the market had–not just the emerging market, but the almost all markets around the world– was whether the Fed was going to lessen the amount of easy money that the Fed was putting into the economy. In my past post few weeks ago, I briefly mentioned the hype my investor friends had in October, 2013 when Fed decided not to taper, with the spike in the stock market. Today, the result is just the opposite. Let us see some of the important immediate release that the Fed had today:

Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

With the economic condition met, which is unemployment rate threshold of under 6.5% and somewhat lenient target of inflation at 2%, Fed is simply staying course with what they have announce. The additional tapering of $10 billion is not something completely uncalled for, but the market still had a pretty big swings around the world. The US stock sank as investors fled from risk, and the Asian market fell further down shortly after Fed’s announcement.

We have briefly discussed during class today about how people’s expectation actually plays an important role in the economy. I presume that the Fed staying on course despite some worries is a fair move to keep their words. Besides, the emerging economies that we speak of right now are expanding at a high rate. Emerging market as a whole is expected to grow at 5.1% in comparison to 4.7% in last year’s expectation. China alone is going to grow at 7.7% and one of the more hard-hit economies like Turkey is projected to grow at 4%. I may be too optimistic and Fed’s decision may hinder some of the outlooks, with foreign exchange distortions and less foreign investments, these economies still have a large bits of buffer zone in their growth.

Despite downplay of some, if not all, markets, I still think FOMC made a right choice in keeping their word.

Taper Time

Today the Federal Open Market Committee (FOMC) announced that it will trim back the current bond buying program by $10 billion a month, bringing the monthly purchases to $65 billion. This FOMC meeting was special beyond the tapering announcement – it was also Ben Bernanke’s last meeting as chairman. Bernanke – who has served as Federal Reserve Chairman since 2006 – will be succeeded by Janet Yellen on February 1. Chairman Bernanke steered the American economy through the most trying economic crisis since the Great Depression by resorting to three rounds of unconventional monetary policy referred to as quantitative easing. As the Chairman departs, the prospects for the American economy look brighter and the tapering announcement puts the capstone on Bernanke’s tenure at the helm of the Fed, but trouble brews abroad and the global economic recovery could prove shakier than anticipated.

In terms of the announcement itself, the Fed did exactly what it said it would do. The FOMC announced it would begin tapering the open-ended bond buying program this past December by $10 billion a month. Despite a weaker than expected December jobs report, economic conditions overall seemed to be improving so most observers expected the Fed to continue as planned and taper again this month. Because a program like QE3 has never been done before, it is important to wind it down slowly to give financial markets time to price in the change. It appears that the Fed is advancing cautiously, continuing the monthly taper so long as labor market conditions and macroeconomic indicators remain positive.

As for what exactly the Fed is looking at when it makes the decision to taper, they announced in their statement:

The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

I believe that there is a problem with using the unemployment target rate of 6.5% for forward guidance is that this number may be hiding the true story. As the FT Alphaville blog points out the drop in the unemployment rate has been coupled with a decline in overall labor force participation rate meaning that the decline in unemployment could just be the result of people giving up looking for work. It may be prudent for Yellen to de-emphasize this target once she takes the helm because changes in the unemployment rate may not mean that labor market conditions have drastically improved.

The last important thing to consider is the effect the taper has on US and global financial markets. US indices slumped immediately after the announcement to end the day down, after an already rough start to the year. And as the WSJ reports, Asian markets opened to a sharp decline of 3% after the news was released. Emerging markets have also faced huge declines over the past two weeks, which could definitely be a consequence of the Fed’s actions – as the Economist Free Exchange blog points out “Fed tightening cycles have consistently generated capital flow reversals over the past 30 years.” This could point to further difficulties in emerging markets as the Fed continues to pull back from its easy money policy, especially in countries like Argentina and Turkey that have been plagued with deep structural problems.

Overall, the tapering seems to be a sign of a brighter future for the American economy. Barring unforeseen extraordinary events, the bond buying program will be completely unwound by September of this year and the next item that Janet Yellen must address are what to do with near-zero interest rates. This next challenge may prove more difficult to tackle, but for now let us hope for a year of positive economic news as the taper continues through this year.

Federal Funds Rate

Recently, the QE program and its prospects on how it may influence the economy has been one of the most media covered news on economics. Upon reading Professor Kimball’s blog post on QE, I had also written a very short blog on the magnitude of its influence around the world. As a continuation of our discussion about the QE today and the Federal Open Market Committee’s meeting just around the corner (Jan 28-29), I thought I might write a blog post on the federal funds rate.

On my last blog ( and also in Professor Kimball’s blog), there were explanations on the state of US economy as of today. In order to revive the US economy after the housing bubble in 2008 and somewhat adverse situations at global scale such as eurozone crisis, the federal reserve has lowered the interest rate down to zero, making it a more viable environment for more borrowing and spending. So far, the scoreboard says the results are not bad. There has been a slow but steady recovery.

If and when the consensus reaches that the US economy has reached a comfortable level of output and economic activity, the interest rate will rise. The question, then, would this might be? According to a recent article on Wall Street Journal, the market may move in a direction to adjust for the higher federal funds rate even before the trigger is pulled. The treasury bonds futures market is trading solely based on the belief that the interest may shoot up half year earlier than expected (Dec. 2014). This is somewhat counter-productive to Federal Reserve’s aim because they have been carefully working to convey their message that the interest rate will not rise until they deem the economy stable.

What are some ramification that we may see due to actual rise in federal funds rate? Rise in Federal funds rate– which is simply the central bank’s target for overnight loans between banks– will make borrowing more costly, seeing some hesitations among borrowers. According to a Bloomberg article, however, the actual expectation that the federal funds rate rising before 2015 is only 18%. Chief Executive of Pacific Investment Management company, which is one of the largest investor in bonds, is also very doubtful that we will see any immediate changes in the interest rate.

To prove some of these points, the economic activity may have been leveling off as seen with the chart below.

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Some of more charts and statistics on the state of US economy can be found here.

The article includes to say that the leveling pattern is the proof that it may be long before Fed completely tapers QE program and start raising the federal funds rate, but I guess we need to wait less than 10 days to see what FOMC has to say about the 2014 outlooks for US economy