The minutes from the December FOMC meeting reveal how the Federal Reserve is going to change the content of its communication to give greater guidance to the market. As Marshal McLuhan recognised, the medium is the message and in the current context, the change in the FOMC’s communication may be tantamount to an easing of the policy stance.
In terms of the process, the minutes indicate that going the committee members will provide view of the appropriate level for the Fed funds target for the Q4 of this year and the news few years. They will also provide a longer-term or neutral Fed funds target. As in the other economic forecasts, the Fed is likely to provide a range, central tendency and distribution of the FOMC members’ forecasts.
That will provide some guidance, but the members will also be explicit and provide the same for what the first increase in the Fed funds target is envisioned based on their economic views. Currently the FOMC statement indicates that there will be no rate hike until mid-2013.
Given the general comments by FOMC members and the fact that the more hawkish regional Presidents (Fisher, Plosser and Kocherlakota) are rotating off for a bit more of a neutral to dovish cast (with the notable exception of Lacker, Pianalto, Lockhart and Williams), the risk is that the first hike is not envisaged until the second half of 2014.
When ever it is, the element of easing lies in pushing out the current mid-2013 time-frame. If the market impact is small it is surely partly because this has been largely signaled or already believed by most market participants.
The FOMC provide some qualitative information about the balance sheet. It is not clear what this means, but it is clearly a concern of many investors and Fed critics. Addressing the topic in some ways is consistent with the more open (though some in the media seeking documents under the Freedom of Information Act may disagree) Bernanke Fed,which now includes press conferences as well.
The FOMC has also working on a mission statement and a draft will be presented at the January 24-25 meeting and could be released afterwards. This is unlikely to be very informative as the Fed’s goals have been provided by Congress and the policy tools are numerous and far-reaching, if its history is any guide.
Noted by its absence, the FOMC minutes suggest there was not much of a discussion of a new round of asset purchases.
Despite the changing composition of the voting members of the FOMC, and the speculation of such in the MBS market and among many primary dealers, the bar to QE3 still seems quite high and one that is unlikely to be used in a preventative mode. That is what other steps, like adjusting the communication and expectations of the first hike, are meant to address.
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