Fed: Deepening the Consensus

Published on April 30, 2014

The most important takeaway from this Federal Open Market Committee meeting was probably what wasn’t in the statement per se, but at least underscored in the absence of a dissent. It is not that there weren’t contentious issues discussed, there were no doubt; it instead says more about the leadership style of Janet Yellen as she settles into the Chair.

*** We do think the Minutes in three weeks’ time are likely to indicate the start to the Committee discussions over the revisit and likely revamp of the June 2011 “Exit Principles.” Indeed, the first round of what will be discussions stretching across several meetings were probably what accounted for the unusual sunshine disclosure of a Board of Governors meeting on Tuesday, since some aspects of the Exit fall under the jurisdiction of the Board rather than the broader FOMC. For instance, as we recall the Interest on Reserves is set by the Board, not the FOMC. ***

*** Otherwise, the only change in the statement was obviously the description of the current “pick up” in activity, with household spending “rising more quickly” albeit with lackluster business spending. It is still “good enough” as we wrote previously (SGH 4/22/14, “Fed: Twist and Turns”) for the FOMC to look past the first quarter slowdown as mostly weather-driven (we doubt they will have taken the GDP all that seriously just yet), and to a near 3% growth that slowly reduces unemployment without much in the way of strongly upward price pressures. ***

*** There was also no change in the forward guidance and another taper as expected — so expected we forgot to even mention the taper in our last report. For all practical purposes, the taper is indeed on a preset course no matter how much they insist to the contrary, and its remaining value is as a signaling tool to the coming changes in the forward guidance, mainly to mark the start to the “considerable time” and that eventual first rate tightening. ***

Looking to the Exit

And dialing back to our first point about the absence of dissents, it seems important to Chair Yellen to bring along as much of the full Committee with her as possible, that is, without dissents from the more hawkishly-inclined Committee members. In this case, it means maintaining a consensus on the “below neutral” fed funds sentence as a cornerstone to the guidance going forward without going into the reasons why it points to a gradual rate trajectory, even if the timing to the actual lift-off is still uncertain.

Those reasons, and indeed, whether they will be even needed, means waiting to see how the data plays out and whether, for instance, to put an increasing focus on wage growth as a barometer to slack and inflation pressures, and if so, just how patient the FOMC can afford to be once wages are on a clearly sustained upward path.

All of this to us is pointing to what by all accounts will the next major phase in the evolution of the guidance and policy stance: the signaling, timing and tools of the long awaited transition to normalized rates and balance sheet in the needed revamp of the Exit Principles. It can take a while for a consensus on such a major policy decision to take shape, probably stretching across several meetings.

That is why we suspect the FOMC would love the luxury of taking until the September meeting to lay out the new Exit to go with unveiling of the 2017 year-end fed funds rate projections, rather than being pressed by the data into showing their hand at the June meeting. But we will see. In the meantime, we expect the April meeting Minutes will probably show that these discussions got underway over the last two days, which should make the Minutes far more interesting than the statement today.

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