The minutes of the January 29 to 30 FOMC meeting released on Wednesday were the blame of the market sell-off. The communication so far is that this signals more and more growing trends of a somewhat less confident Federal Reserve when it comes to just how long and to what extent the endless quantitative easing should go. The problem is the market participants and market observers are looking for every clue that they can get their hands on to determine what sort of time frame that Ben Bernanke and friends will ultimately begin their long exit of the quantitative easing measures.
What is so interesting is that the latest minutes contained other guidance than normal, and they also included different dissention from what investors were used to in 2012. The most obvious result in the latest Fed minutes is that in the effort to increase transparency with setting thresholds, the FOMC communication is temporarily FUBAR.
Investors are currently hanging on to every word of anyone out of the Fed right now. The “real” likely cause of the market sell-off on Wednesday in stocks is that the market was getting overbought at a time that the post-earnings were getting weak on the heels of a negative Q4-2012 GDP reading. Investors were looking for a reason to sell after big gains and they got their reason even if that reason was as simple as garbled communications. Our take is that the FOMC and its members probably wish they could take back all of those minutes from Wednesday after seeing how the markets reacted.
St. Louis Fed President James Bullard has been giving a speech in New York today and he signaled that the Fed will consider several different aspects of the labor market before slowing its bond buying efforts. While the Fed is buying spending $85 billion per month to buy mortgage and Treasury securities, the minutes showed that some dissention is growing over when and how much bond buying will continue into a job market improvement.
In today’s speech, Bullard said that the Fed thresholds (6.5% unemployment and 0.5% over the 2.0% inflation projection for several months) imply that a rate increase is possible in mid-2014 but he also said that the policy rate will hold at zero for longer than ordinary. Bullard then said that the Fed might do something if those thresholds are crossed, but he said that the FOMC has probably not been clear enough about how these thresholds work. Another comment is that he’d be willing to adjust bond purchases in increments of $10 billion to $15 billion.
All of this matters about Bullard because is a voting member on Fed policy this year.
Esther George of the Kansas City Fed said that she fears that the Fed’s $85 billion bond buying could cause economic and financial imbalances. Sandra Pianalto of the Cleveland Fed has also this month said that the Fed may need to scale back bond buying to lower the risk of financial turbulence.
Now we have seen comments from a speech by San Francisco Fed President John Williams at the New York Forecasters Club. His comments are really about why the recovery has been so tepid, but as you would expect it comments on how to exit the bond buying and the problems around it. He even said that he expects the unemployment rate to stay at or above 7% at least through the end of 2014 and to not drop below 6.5% until the second half of 2015.
Dallas President Richard Fisher is set to give a speech at the IICF Texas Southeast Division Benefit Dinner later today. Stay tuned.
What is taking place sounds very complicated because you have Fed presidents speaking with different views all at once. Looking at the eye in the middle of the tempest of the teapot actually shows something rather simple: Fed communication for the moment is FUBAR. The FOMC minutes were long and the analysis and flow of commentary around the minutes only brought confusion about the scale and timing of an exit to the bond buying and quantitative easing. With so many Fed presidents speaking today that confusion is likely to remain.
The Federal Reserve and the FOMC will get their act together in the realm of communications again. We have a month or so before the next FOMC meeting and FUBAR communications cannot last forever.
Maybe it isn’t really a FUBAR analogy. Maybe it should say SNAFU.