Oh, this is just great. More gnashing of teeth trying to figure out what the Federal Reserve is trying to tell us.
First off, here’s a fact: the highly anticipated release of the Federal Reserve’s minutes of its October meeting didn’t hold any major or straightforward revelations. Nevertheless, the interesting bit is some market watchers decided the Fed was trying to send a hidden message about when it plans to start dialling back its massive $85 billion-a-month bond buying programme.
So what can you really decipher from the minutes?
I) Not much in terms of taper timing, to be honest. But the minutes document convinced some investors at least that tapering could come sooner rather than later. Earlier, the bets were of an April announcement; going by reports in marketwatch.com, ft.com and cnbc.com, the minutes’ statements seem to have increased market bets of a winding-down being announced in December or January next year.
II) There also is no unanimity within the Federal Reserve on when to start tapering (reducing the pace of bond purchases). No sentence began with “All participants agreed….”. Agreement over issues ranged widely from “a few participants” to “one participant”. No wonder there’s no clear message coming out.
In fact, disagreement over what to do next has also been quite public. For instance, over the past few weeks, some Fed officials like Janet Yellen (chairman-in-waiting of the Federal Reserve) and Narayana Nacherlakota (president of the Minneapolis Federal Reserve) have voiced support for continuing monetary stimulus (Kocherlakota, however, isn’t a voting member on the Federal Open Market Committee, the decision-making body, this year), while others like Charles Plosser (president of the Philadelphia Federal Reserve) have advocated pulling the plug on bond purchases sooner rather than later. (He is also not a voting FOMC member this year).
III) It very much looks like the monthly jobs report (out early December) will be the deciding factor on when the Fed starts to taper. No Fed official wants to be on the hook for removing stimulus amid a jobless economic recovery (if it can be called that). The Federal Reserve may be politically independent, but even the world’s most influential central bank can’t escape the backlash if it tightens monetary conditions at a time when enough jobs aren’t being created. Alan Greenspan couldn’t do it in 2003, and Bernanke isn’t going to be able to do it in 2013 either.
[Just an aside: The word ‘labor’ was mentioned 27 times in the document, higher than ‘consumer’ (15), ‘markets’ (14) or ‘mortages’ (17). Another important word was “inflation”, which got mentioned 35 times. Hardly surprising though, since price stability and maximum employment are the dual mandates of the Fed.]
What’s the key takeaway from all this? No, we don’t know for sure that the Fed will announce tapering in December. But watch out for the jobs report early next month. That will perhaps offer the best clue on what the Fed’s stimulus wind-down schedule will look like going forward.
The Federal Reserve holds its next meeting on December 17-18.