The single biggest takeaway we read into the Federal Open Market Committee’s statement this afternoon is what they could have said, but didn’t.
*** But first, the sum of the parts to the statement should be taken to be telegraphing the December FOMC meeting will be a “live” one, meaning that first taper will be back on the table. We were reluctant to assume no chance of a December first taper in large part because we have been suspecting the cost and efficacy issues will soon resurface. But more than anything else, the phrasing of this statement – including what was not said – was meant to shoot down the suddenly growing expectations of “QE forever,” or of any guarantee of bond purchases continuing at the current pace deep into next year. ***
*** For now, however, while put back on the table, we continue to believe a December taper, while a possibility, is still more unlikely than not, or at least that it still has to be preceded by some pretty cooperative data. And the Fed still needs to use the next seven weeks to better refine its communications policy to ensure a smooth transition of bond purchases being wound down with a fiercely reinforced forward guidance on rates. Oh, and some help from Congress would also be very nice. ***
What They Didn’t Say
First, as we suggested they might in our report yesterday (SGH 10/29/31, “Fed: Waiting for the Man”), the FOMC opted against getting too pessimistic in downgrading the all-important economic outlook in the first two descriptive paragraphs of the statement, and certainly by much less than the street’s gloomy forecasts.
In doing so, the FOMC was flat out refusing to validate the “QE forever” frenzy from much of Wall Street and a few policy shops that was suddenly filling everyone’s inboxes since the delayed September Non-farm Payroll numbers.
Second, the FOMC decided to drop altogether the reference to tightening financial conditions. So in some sense, like a warship firing salvos to bracket its target, we now know where the Fed is most comfortable with yields at this stage of the recovery: below 2% was too damn low, but 3% was threatening to be too high — especially if sustained, as the September statement noted.
That fear was a major driver to the September decision to hesitate on the first taper (SGH 10/1/13, “Fed: Forward Guidance, Fiscal Retrenchment, and the Taper”). But that concern certainly seems to have subsided since.
And What They Did Say, to Congress
Just as importantly, the FOMC put further markers down on fiscal policy drag. In the first section of the statement, they included that stand alone declarative sentence that “Fiscal policy is restraining economic growth;” and later they prologued the policy paragraphs with an opening clause — “[T]aking into account the extent of federal fiscal retrenchment over the past year” — taking another swipe at Congress that better fiscal policy could free the recovery of the need for such extraordinary monetary policy support.
In other words, if the Budget Committee Conference should cut a deal by its mid-December deadline — a few days before the FOMC’s year-end December 17-18 meeting — it could lift the odds for the Fed to indeed undertake that first taper. That would assume, of course, that the data cooperates as well in the meantime.
That said, we do think the Fed also still has its work cut out for itself on the communications front to ensure a smooth transition in winding down the stock of bond purchase accommodation with its reinforced rates guidance. We rather suspect the speeches coming over the next few weeks will be seeking to do just that, with a renewed accent on the costs and efficacy of continued QE to make sure the bubblier QE assumptions are dampened if not crushed.
One other useful aspect of today’s statement, by the way, is that flushing out the QE forever chatter will no doubt help provide a useful backdrop to Vice Chair Janet Yellen’s confirmation hearings in two weeks.