We Just Heard From Tons Of Fed Heads, And This Is What We Learned

janet yellen

The week is not over yet, but the big story all week as the endless chatter from Fed heads.

Deutsche Bank’s Carl J. Riccadonna has a really great roundup of what was important that was said.

His conclusion: Operation Twist will expire in June.

Public comments from various Fed officials over the past week suggest that soft March payrolls did not rattle policymakers’ nerves to a significant degree, and partly as a result of this the FOMC is not as close to additional unconventional accommodation (i.e. Twist extension/expansion) as some analysts previously anticipated. We maintain the view that Twist will expire at the end of June. In a week replete with Fedspeak, a couple of important themes emerged: First, several officials emphasised that despite the soft March payroll print, the labour recovery appeared to remain intact. They acknowledged possible weather effects and instead focused on the pace of job creation over the past several months. Second, voting Atlanta Fed President Lockhart and Vice Chair Yellen managed expectations regarding forthcoming policy.

President Lockhart noted that the concept of reverse repo-funded augmentation of Twist, often referred to as “Sterilized Twist”, originated outside of the Fed; furthermore, he had not seen an in-depth analysis of such a measure, although it could be an option. He went on to say he would be “reticent” to support additional QE and also suggested that many of his colleagues may have the same view on policy options. Overall, the tone of his remarks suggested policymakers are not ruling out “Sterilized Twist”—but they are also not on the verge of implementing such a program.

This notion was reinforced in Yellen’s remarks, which highlighted a “genuine improvement in the labour market”—and also suggested more accommodation would be warranted only if the economy appeared to be falling short of expectations. The last update of central tendency forecasts pegged 2012 growth at 2.2-2.7% and year-end unemployment at 8.2-8.5%. Both Yellen and Lockhart emphasised “stock” versus “flow” with respect to policy accommodation. In other words, they view additional Twist (regardless of “sterilization”) as further policy easing but continued reinvestment of maturing assets as a neutral stance. Yellen specifically noted that the end of Twist would not constitute a tightening. Lockhart indicated he would view ceasing reinvestment as a tightening, but this was unlikely by June. Perhaps Chairman Bernanke will contribute to this discussion, when he speaks today on “Reflections on the Crisis and the Policy Response”.

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