Up until Cyprus erupted into the scene, the Federal Reserve had been the main protagonist in the market.
On Wednesday, the Fed will conclude its latest two-day FOMC meeting, releasing a statement where it will reaffirm its commitment to quantitative easing and ultra-loose monetary policy, according to Goldman Sachs’ chief economist.
The market can continue to bank on the Fed’s asset purchases until the third quarter of next year, while interest rates should remain at the zero-range until early 2016, Goldman’s research team said.
Like billionaire hedge fund manager David Tepper a few years ago, Bernanke is “balls to the wall” when it comes to keeping the Fed ultra-loose.
Despite rising voices of discontent in the Fed, with a vocal minority warning of the risks of QE and continued monetary easing, and in the face of an improving economic environment, the FOMC will once again assure market participants it has their back.
The Fed has been engaged in an $85 billion-a-month asset purchase program in which it is buying up Treasuries and residential mortgage-backed securities (RMBS) until it sees a “substantial” improvement in the labor market.
At the same time, the Fed’s leadership is committed to keeping the Federal Funds Rate stuck in the zero range until the unemployment rate drops below 6.5% and inflation remains contained, with forward expectations not exceeding 2.5%.
Don’t expect this to change on Wednesday, Goldman’s Jan Hatzius and Sven Jari Stehn said in an FOMC preview note.
Despite economic growth that approached 0% in the fourth quarter, underlying conditions have improved, with housing prices recovering and the economy adding 187,000 jobs a month over the past six on average.
Bernanke’s elusive wealth effect seems to be picking up, as stocks hit record highs and consumption remains relatively resilient.
The Fed will acknowledge this, possibly pushing their GDP projection up to 2.7% for 2013 and to 3.4% for 2014; their estimate for the unemployment rate should come in at 7.4% for year-end 2013, 6.8% in 2014, and 6.1% in 2015.
Some within the Fed’s inner circle have argued the Fed’s extraordinarily loose monetary policy is fraught with risk, pointing to economic improvement and voicing their discontent.
Beyond the repeated dissents of Richmond Fed President Lacker, now succeeded by Kansas City Fed dissenter Esther George, the silent minority got loud in January, forcing some cautionary language into last statement’s minutes and spooking addicted market participants, who thought the Fed could be ready to taper its asset purchases before the jobs market picked up.
Yet Fed leadership will have nothing of it, according to Goldman. There will be no additional references of the costs and risk of QE in Wednesday’s statement, which should resemble January’s pretty closely.
Both Ben Bernanke and vice chairwoman Janet Yellen have made it clear QE will remained tied to a substantial improvement in labor conditions, which should at least include continued payroll growth and an improvement in hiring, the quit rate, and real GDP.
The Fed’s leadership will point to the recent flare up in Europe’s sovereign debt crisis as downside risk to the economic outlook, now that Cyprus could potentially become the first nation to leave the monetary union.
Asked about what’s left in his arsenal, Bernanke could point to the Fed’s new forward guidance, which automatically would extend the date of the first interest rate hike if the outlook deteriorates. According to Goldman, guidance is the first line of defense, rather than more QE.
The resurgence of the European sovereign debt crisis does appear timely for the Fed, particularly as reporters will grill the Chairman on his continued use of QE and low rates.
The yield on 10-year rates had been on a steady upward trajectory since December, but dropped relatively hard over the past couple of weeks as risk-aversion was back on investors’ mind; 10-years were yielding 1.94% by noon in New York on Wednesday, while managed to break above $1,600 an ounce over the past few days after continued underperformance.
Major Wall Street names like Citigroup, Goldman Sachs, JPMorgan Chase, and Morgan Stanley have all trended lower over the past few days as Europe’s woes have become explicit.
At the end of the day, the Fed won’t stray from its path on Wednesday. It has drawn the battle lines and will keep to its game plan, with Bernanke banking on the Cyprian crisis as evidence that unexpected exogenous events can impact the U.S. economy.
QE, it seems, is here to stay. And possibly, those like Tepper will remain “balls to the wall” long on U.S. equities as long as the Bernanke put is in place.
forbes.com
On Wednesday, the Fed will conclude its latest two-day FOMC meeting, releasing a statement where it will reaffirm its commitment to quantitative easing and ultra-loose monetary policy, according to Goldman Sachs’ chief economist.
The market can continue to bank on the Fed’s asset purchases until the third quarter of next year, while interest rates should remain at the zero-range until early 2016, Goldman’s research team said.
Like billionaire hedge fund manager David Tepper a few years ago, Bernanke is “balls to the wall” when it comes to keeping the Fed ultra-loose.
Despite rising voices of discontent in the Fed, with a vocal minority warning of the risks of QE and continued monetary easing, and in the face of an improving economic environment, the FOMC will once again assure market participants it has their back.
The Fed has been engaged in an $85 billion-a-month asset purchase program in which it is buying up Treasuries and residential mortgage-backed securities (RMBS) until it sees a “substantial” improvement in the labor market.
At the same time, the Fed’s leadership is committed to keeping the Federal Funds Rate stuck in the zero range until the unemployment rate drops below 6.5% and inflation remains contained, with forward expectations not exceeding 2.5%.
Don’t expect this to change on Wednesday, Goldman’s Jan Hatzius and Sven Jari Stehn said in an FOMC preview note.
Despite economic growth that approached 0% in the fourth quarter, underlying conditions have improved, with housing prices recovering and the economy adding 187,000 jobs a month over the past six on average.
Bernanke’s elusive wealth effect seems to be picking up, as stocks hit record highs and consumption remains relatively resilient.
The Fed will acknowledge this, possibly pushing their GDP projection up to 2.7% for 2013 and to 3.4% for 2014; their estimate for the unemployment rate should come in at 7.4% for year-end 2013, 6.8% in 2014, and 6.1% in 2015.
Some within the Fed’s inner circle have argued the Fed’s extraordinarily loose monetary policy is fraught with risk, pointing to economic improvement and voicing their discontent.
Beyond the repeated dissents of Richmond Fed President Lacker, now succeeded by Kansas City Fed dissenter Esther George, the silent minority got loud in January, forcing some cautionary language into last statement’s minutes and spooking addicted market participants, who thought the Fed could be ready to taper its asset purchases before the jobs market picked up.
Yet Fed leadership will have nothing of it, according to Goldman. There will be no additional references of the costs and risk of QE in Wednesday’s statement, which should resemble January’s pretty closely.
Both Ben Bernanke and vice chairwoman Janet Yellen have made it clear QE will remained tied to a substantial improvement in labor conditions, which should at least include continued payroll growth and an improvement in hiring, the quit rate, and real GDP.
The Fed’s leadership will point to the recent flare up in Europe’s sovereign debt crisis as downside risk to the economic outlook, now that Cyprus could potentially become the first nation to leave the monetary union.
Asked about what’s left in his arsenal, Bernanke could point to the Fed’s new forward guidance, which automatically would extend the date of the first interest rate hike if the outlook deteriorates. According to Goldman, guidance is the first line of defense, rather than more QE.
The resurgence of the European sovereign debt crisis does appear timely for the Fed, particularly as reporters will grill the Chairman on his continued use of QE and low rates.
The yield on 10-year rates had been on a steady upward trajectory since December, but dropped relatively hard over the past couple of weeks as risk-aversion was back on investors’ mind; 10-years were yielding 1.94% by noon in New York on Wednesday, while managed to break above $1,600 an ounce over the past few days after continued underperformance.
Major Wall Street names like Citigroup, Goldman Sachs, JPMorgan Chase, and Morgan Stanley have all trended lower over the past few days as Europe’s woes have become explicit.
At the end of the day, the Fed won’t stray from its path on Wednesday. It has drawn the battle lines and will keep to its game plan, with Bernanke banking on the Cyprian crisis as evidence that unexpected exogenous events can impact the U.S. economy.
QE, it seems, is here to stay. And possibly, those like Tepper will remain “balls to the wall” long on U.S. equities as long as the Bernanke put is in place.
forbes.com
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