Market Economics | Interest Rate Strategy - BNP PARIBAS ...

President Bullard was generally supportive of QE2
even as he advocated normalising rates, making him
difficult to categorise at times. Meanwhile, President
Hoenig stood out as the hawkish curmudgeon. He
dissented at virtually all of the FOMC meetings in
2010, first in favour of less commitment to
exceptionally low rates for an extended period and
then against the initiation and continuation of QE2.
Rotating in as voters are Chicago Fed President
Evans, Philadelphia Fed President Plosser, Dallas
Fed President Fisher and Minneapolis Fed President
Kocherlakota. President Evans is a vocal backer of
QE2. President Kocherlakota initially expressed
scepticism about QE2, but more recently said he is
“very comfortable with our current monetary policy
stance”. He has also indicated he remains concerned
about headwinds to growth from household wealth
destruction and restructuring in the banking sector.
The regional Fed Presidents rotating in as voters
have a clearly more hawkish bent than those rotating
out. However, it seems unlikely that the rotation will
lead to a greater number of dissents in the near term.
We may see no dissents at the January meeting. We
think President Plosser is the most likely dissenter as
he has opposed nearly all of the Fed’s
unconventional policies. His core view is that
monetary policy has very little influence on real
economic growth.
Dallas Fed President Fisher was one of the FOMC
members who came out with vocal criticism of QE2
immediately after its announcement. He said it may
be the “wrong medicine” for the economy, that the
Fed risked its stature and independence in initiating
the programme and that the Fed was basically
monetising the debt.
More recently, President Fisher has said he doesn’t
know if he will dissent. He indicated he “would be
wary” about any expansion of the Fed’s balance
sheet beyond QE2 but also that he expects the
programme announced in November “will be carried
through”. President Plosser has also been a critic of
Fed policies, recently saying “the aggressiveness of
our accommodative policy may soon backfire on us if
we don’t begin to gradually reverse course”.
That said, he has not made clear he wants to end the
programme now. He has said he wants to see how
both the economy and the policy evolve. Similarly,
President Fisher has indicated that he expects QE2
to be completed but would not favour any expansion.
In the near term, the FOMC may express more
solidarity behind the already-announced USD 600bn
programme of Treasury purchases than we have
seen in a while.
The economic
paragraph is still
appropriate;
while Q4 GDP is
likely to be
robust, ongoing
weakness in the
labor market
suggests
moderation is
likely. The
FOMC named
housing, state
and local
government
finances and the
European fiscal
crisis as
ongoing sources
of downside risk
in the December
minutes.
The FOMC is
likely to stay the
course on QE2
. with little to no
changes in this
paragraph.
FOMC Statement December 14, 2010
Information received since the Federal Open Market Committee met in November confirms
that the economic recovery is continuing, though at a rate that has been insufficient to bring
down unemployment. Household spending is increasing at a moderate pace, but remains
constrained by high unemployment, modest income growth, lower housing wealth, and tight
credit. Business spending on equipment and software is rising, though less rapidly than earlier
in the year, while investment in nonresidential structures continues to be weak. Employers
remain reluctant to add to payrolls. The housing sector continues to be depressed. Longerterm
inflation expectations have remained stable, but measures of underlying inflation have
continued to trend downward.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment
and price stability. Currently, the unemployment rate is elevated, and measures of underlying
inflation are somewhat low, relative to levels that the Committee judges to be consistent, over
the longer run, with its dual mandate. Although the Committee anticipates a gradual return to
higher levels of resource utilization in a context of price stability, progress toward its objectives
has been disappointingly slow.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time,
is at levels consistent with its mandate, the Committee decided today to continue expanding
its holdings of securities as announced in November. The Committee will maintain its existing
policy of reinvesting principal payments from its securities holdings. In addition, the Committee
intends to purchase $600 billion of longer-term Treasury securities by the end of the second
quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the
pace of its securities purchases and the overall size of the asset-purchase program in light of
incoming information and will adjust the program as needed to best foster maximum
employment and price stability.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and
continues to anticipate that economic conditions, including low rates of resource utilization,
subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally
low levels for the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and
will employ its policy tools as necessary to support the economic recovery and to help ensure
that inflation, over time, is at levels consistent with its mandate.
The Committee
has seen no real
progress on its
mandates.
Unemployment
dropped, but
mainly on
declining labor
force participation
rather than strong
job creation, and
weakness in core
inflation has
rotated from
housing to
services.
No changes
needed.
Julia Coronado 20 January 2011
Market Mover
11
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