BofA: 'The Fed Has Taken A Step Backwards'

tired ben bernankeUS Federal Reserve Bank Board Chairman Ben Bernanke testifies before a joint congressional hearing on the country’s economic outlook on Capitol Hill in Washington, April 2, 2008.

The Federal Reserve has in recent years has changed its communications practices in order to provide financial markets more transparency into the policymaking process.

Not everyone is happy about the way some of these practices have evolved. For example, the plethora of appearances by Federal Reserve governors in the weeks following FOMC meetings and other key events tend to introduce a wide range of views into the public discussion and inject unnecessary volatility into financial markets as investors try to parse every word of each new speech.

Following yesterday’s release of the minutes from the Fed’s June FOMC meeting on monetary policy, BofA Merrill Lynch economists Michael Hanson and Ethan Harris level that same charge at the central bank.

In a note to clients – titled “Muddled minutes” – they write:

The Fed has taken a step backwards in terms of communication. By offering so much information in such a muddled fashion, they have made policy less transparent. Why do Fed watchers need to read deeply into what is effectively an appendix to the minutes to find out that “about half” of participants want to exit QE by year end?

Moreover, why have we returned to the Greenspan days of needing a decoder ring to understand Fed statements: are these “participants” who want an early exit “members” or nonmembers, and what exactly do “several,” “many,” or “about half” mean? Looking through the Fed fog, we remain reasonably confident that rate hikes will come later than the markets expect. But with these minutes, the outlook for the start and end of QE3 has become much more muddled. 

Hanson and Harris try to break it down like this:

Figuring out how many voting members want to wrap up QE3 this year requires a process of elimination. There are 19 participants: 12 voting “members” (7 governors and 5 regional Bank presidents) and 7 non-voting participants (the remaining Bank presidents). “All participants but one” thought the Fed should “continue purchasing both” MBS and Treasuries according to the minutes. The “one” is almost surely George, who dissented at the meeting and wants to exit QE immediately.

That leaves 18 participants and “about half” of them want to end QE this year. That probably means 8 participants. Three of those are almost certainly the remaining non-voting hawks (Fisher, Lacker and Plosser). Two or three others are likely non-voting presidents have given speeches that suggest hinting at an early exit (Williams, Pianalto and possibly Lockhart). So that leaves two or three voting members who want to exit QE this year if their economic forecasts are correct. The remaining majority would be the “many other participants” who thought “it likely would be appropriate to continue purchases into 2014.” Obviously, there is considerable uncertainty here and there could be as many as five “early exit” voters, leaving Bernanke with a very slim majority.

In short, there’s probably still some room for improvement on the Fed’s part.

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