Is Yellen Asking WWBD (What Would Bernanke Do?)

The March 19, 2014 FOMC Meeting will be the first official meeting for Janet Yellen as the chair of the FOMC, and to complicate matters, this is the meeting with a Press Conference, where Yellen will have the pleasure of being interrogated by local media members on Fed’s monetary policy and the pace of tapering.  Of course, the taper is expected to continue and there may also be some changes to the forward guidance (according to a string of comments by other Fed officials ahead of the FOMC Meeting), including a possible elimination of the 6.5% unemployment threshold. Comments by a number of Fed officials in recent weeks suggest that, despite the recent turmoil in some emerging markets, the Ukraine crisis, and the softer news on activity at home, the Fed will stick to its timetable.

If it were up to Bernanke, who spoke on the 7th of March after the better than expected Non-farm Payroll report was released, we’ll probably see very little change in the upcoming FOMC statement, here’s a quick summary of Bernanke’s comments:

  • Fed felt more communication from the Fed to markets was better than less as it needed to help markets understand the goals from the Fed
  • US economy should continue to recover, headwinds to economic growth appear to have eased
  • Economy still has a ways to go in its recovery, jobs report today is a sign of continued recovery
  • Cheaper natural gas prices have contributed to bringing jobs back to the US
  • Pleased there is less political wrangling in Washington recently regarding the debt ceiling and budget.

Of course Bernanke no longer has to worry about the market taking his comments out of context, but in a way his words also confirmed that tapering is likely to continue as planned, so the main focus of the FOMC meeting will probably be on the potential changes in forward guidance, and here is a quick summary of what was said recent by Fed officials:

  • Fed Chair Yellen: There are many views on how to cast forward guidance, the debate continues as we get closer the 6.5% threshold; need to consider a broad range of indicators to help guide markets on our thinking. December policy statement gave some additional qualitative guidance.
  • Fed’s Plosser (hawk, voter): Fed’s inflation threshold may no longer have any meaning, Fed’s prior forward guidance is now outdated; Fed’s communications on QE have been confusing. Fed cannot maintain discretion and support forward guidance at the same time. Failure to act on the employment threshold may weaken faith in the inflation threshold. – Fed needs to decide what the purpose of forward guidance really is.
  • Fed’s Pianalto (FOMC voter, moderate): Bond buying generally eased financial conditions and borrowing costs; Expects Chair Yellen to be open minded in economic solutions. Forward guidance on rates has proven itself effective.
  • Fed’s Williams (dove, FOMC non-voter): Opposes new threshold to replace 6.5% unemployment, reiterates Fed needed to change its guidance very soon as unemployment has already fallen to 6.6%. New forward guidance should be verbal, be backed up by the Fed economic forecasts.
  • Fed’s Evans (dove, alternate): Cannot say when Fed will change its guidance, in favor of first interest rate increase at some point in 2016 – Current taping pace is appropriate – New rate guidance is needed by the time we reach 6.5% unemployment level, but need to reinforce that rates will remain low for some time.

As we can see from above comments, some members are calling the forward guidance outdated while others are calling for a change by the time 6.5% Unemployment is reached. Bernanke is suggesting more communication  by the Feds is better than less, and Yellen is open-minded (according to Pianalto), but ultimately there isn’t a sense of urgency at this meeting for the Feds to modify its forward guidance, not when the unemployment rate is back up to 6.7%.

If FOMC were to drop the 6.5% threshold for Unemployment, we should see some selling pressure on the USD, and if the FOMC were to add a lower bound of CPI, such as 0.7%, in order to increase asset purchases, then we should see more accelerated selling on the USD.  I really don’t see much upside for the USD unless Yellen were to increase tapering by $20B instead of $10B.

I guess it’s a can of worms that Yellen will probably postpone to the next meeting, but if there are any changes to the forward guidance, they are more likely USD negative.






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Is Yellen Asking WWBD (What Would Bernanke Do?)