Fed wants to exit QE but keep long-term rates low - page 3
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El-Erian Warns "Fed May Have Won The 'Taper' Battle; But Are Yet To Win The 'QE-Exit'
With equity markets reacting enthusiastically to the Fed’s historic policy change announced last week, PIMCO's Mohamed El-Erian notes many have rushed to declare victory. Whether in asserting investor comfort with the policy regime shift or in declaring the definitive end of dependence on quantitative easing (“QE”), they believe that the markets’ short-term reaction can indeed be extrapolated into the longer-term. While most Fed officials will welcome the markets’ favourable reaction – and especially so after the May-June shock – El-Erian suspects that they are much more cautious. Indeed, in this FT Op-Ed, he lays out four reasons why such caution is understandable.
Via The FT,
...Of course, a glance around the world - from Turkey to Thailand and even in credit and volatility markets in the last few days, and perhaps El-Erian's caution is warranted.
source
Fed’s Williams: Fed Likely to Taper More, End Bond-Buying This Year
Federal Reserve Bank of San Francisco President John Williams said Tuesday he welcomed the central bank’s recent decision to pull back on its easy-money policies, and he said he expects the Fed’s bond-buying purchases to end at some point this year.
“Assuming the economic recovery plays out as we expect, we will likely continue to reduce the pace of those purchases, and eventually eliminate them, over this year,” Mr. Williams said.
The official was referring to the Fed’s decision to slow the pace of its bond-buying stimulus program in December, when central bankers cut the monthly pace of Treasury and mortgage purchases to $75 billion from $85 billion.
“With the economy having improved so much and the future looking brighter, it was time to start taking our foot off the accelerator and ease up on the monetary stimulus,” Mr. Williams said in the text of a speech prepared for delivery before an Arizona bankers group in Phoenix. The central banker has been a longstanding supporter of the asset buying as a way to help stimulate growth and lower unemployment, and he said the action taken last month was a “first step” to bringing monetary policy back toward a more normal profile.
Mr. Williams stressed in his remarks that while he expects continued growth to allow the bond purchases to be wound down over the course of the year, what happens with the program will depend on the economy. He also said that still high unemployment and weak inflation calls for “for continued monetary accommodation.”
Mr. Williams stressed that even as the pace of bond-buying has slowed, “scaling back on asset purchases is not a retreat from accommodative monetary policy. The federal funds rate will remain near zero for the foreseeable future.” He added, “we’re starting to ease off the gas, but we’re nowhere near hitting the brakes yet.”
The monetary policy-setting Federal Open Market Committee has said that near-zero percent short-term rates will stay at those levels until the jobless rate goes below 6.5% as long as inflation stays contained. Most Fed officials expect to keep rates low until some time in 2015. At the same time, many in markets expect to see a steady reduction in bond-buying along the contours suggested by Mr. Williams in his speech.
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Fed tapered as it saw QE benefits slip over time
Federal Reserve officials agreed in December to begin winding down their asset-purchase program as most believed that the benefits of the controversial policy were eroding as time passed, according to minutes from their last meeting released Wednesday.
Minutes from the Dec. 17-18 meeting included the results of a survey of officials about the costs and benefits of the program, commonly called quantitative easing.
The survey found that “a majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue.”
A survey of officials conducted prior to the start of the meeting found that most Fed members think the central bank can conclude the bond purchases in the second half of the year.
By a 9-to-1 vote, the Fed on Dec. 18 decided to trim its asset-purchase program by $10 billion to $75 billion per month starting in January.
Officials said that this was a cautious first step as some were worried about an unintended tightening of financial conditions.
According to the minutes, some officials wanted a larger reduction in asset purchases in December and to bring the program to a close “relatively quickly.”
Some wanted the Fed to set down in writing the steps it would take to reduce the program and propose a completion date.
But Fed voting members decided that future reductions “would be undertaken in measured steps.” They stressed that tapering was not on a “preset course.”
U.S. stocks were down at session lows after the minutes were released. See live blog of stock market.
The long end of the bond curve saw diminished interest as yields on the 10-year Treasury 10_YEAR +2.24% looked set to close above 3%.
The Fed also made important changes to the language of its statement. It said it would not raise short -term interest rates until “well past the time” that the unemployment rate fell below 6.5%. The minutes show that only a “few members” — by members, the Fed is referring to voters — wanted to lower the unemployment threshold to 6%.
Some Fed officials argued against lowering the threshold, according to the minutes, because changes would be confusing and undermine the central bank’s credibility.
In their statement, the central bankers also said for the first time that they would be watching low inflation carefully.
But the minutes show that most officials believe that inflation will move back towards the Fed’s 2% target.
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Is this the year growth takes off?
WHEN Ben Bernanke became chairman of the Federal Reserve (America’s central bank) eight years ago, unemployment had just slipped below 5%, growth had clocked in at 3.5% and inflation was stable. “The expansion in economic activity appears solid,” the Fed declared the day before he took office. Yet beneath the surface a crisis was brewing—and the worst slump since the 1930s.
For Janet Yellen (pictured), who was confirmed by the Senate on January 6th to succeed Mr Bernanke next month, the situation is the opposite. Unemployment is 7%, growth has struggled to get past 2% and inflation is too low. Yet beneath the surface are tantalising signs that, as Barack Obama put it: “2014 can be a breakthrough year.”
It may have begun sooner. Booming exports and investment in business equipment suggest that economic growth may have topped 3% (annualised) in the fourth quarter. If so, then GDP for all of 2013 would have grown by 2.7%, the first time since the recession that it has performed as well as the Fed predicted (see chart 1).
What they’re telling Yellen
The central bank’s crystal-ball-gazers expect growth to reach 3% this year; private-sector seers say 2.8%. Recent experience calls for scepticism. Almost every year since 2008 both the Fed and private economists have predicted an uptick, only to be disappointed. This year, however, they disagree less about the prospects for unemployment and inflation. Such harmony usually foreshadows greater accuracy, according to Goldman Sachs, a bank.
The chief reason for optimism is that fiscal policy will switch from being a gale-force headwind to a stiff breeze. Higher taxes and federal spending cuts knocked 1.5 percentage points off growth in 2013. This year, Goldman reckons fiscal drag will total just 0.4 points (see chart 2). It may be even less: as The Economist went to press, Congress was debating a three-month renewal of extended unemployment benefits.
Household balance-sheets offer another reason to be upbeat. Thanks to rising stock and house prices, household net worth is back at a record high. Low mortgage rates, defaults and belt-tightening have brought household debt burdens almost back to their long-term trend. Thanks to rising prices, the number of homes worth less than their mortgage dropped from 10.5m at the end of 2012 to just 6.4m in the third quarter of last year, reckons CoreLogic, a property-data firm (see chart 3). That should boost consumer spending and encourage banks to lend more.
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Next Cut in Fed Bond Buys Looms
The Fed is on track to trim its bond-buying program for the second time in six weeks as a lackluster December job report failed to diminish the central bank's expectations for solid U.S. economic growth this year.
By Jon Hilsenrath
The Federal Reserve is on track to trim its bond-buying program for the second time in six weeks as a lackluster December jobs report failed to diminish the central bank’s expectations for solid U.S. economic growth this year, according to interviews with officials and their public comments.
A reduction in the program to $65 billion a month from the current $75 billion could be announced at the end of the Jan. 28-29 meeting, which would be the last meeting for outgoing Chairman Ben Bernanke.
The Fed has been buying Treasurys and mortgage bonds in an effort to drive down long-term interest rates and spur spending, hiring and investment. Last year the Fed spent $85 billion a month buying bonds. Mr. Bernanke suggested at a December news conference that officials were inclined to continue cutting purchases in $10 billion increments at subsequent meetings as long as the economy keeps strengthening.
“We’re likely to continue on a path of gradual, measured reductions in the pace of purchases, assuming the economy tracks as we expect it to,” San Francisco Fed President John Williams said in an interview early in the month.
Bond buying is one of two prongs in the Fed’s strategy to boost the economy. The other is low interest rates, and Fed officials are once again debating how best to describe their plans for when they eventually begin raising short-term rates.
In December, the Fed said rates would remain near zero “well past” the time when the unemployment rate falls to 6.5%. The Fed is in no hurry to raise interest rates. But because officials have tied their plans to movements in the jobless rate, they see a need to better explain their plans as the jobless rate drops.
The Labor Department reported employers added just 74,000 jobs in December, a slowdown from average gains of 214,000 during the four previous months. Many Fed officials doubt the economy is as weak as the December report suggested. The data may have been distorted by bad weather or normal statistical variation. Many other indicators suggest the recovery picked up strength during the second half of 2013, driven in part by stronger consumer spending and improved trade.
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