December’s last salvo before going into holiday mode was the surprise Federal Reserve decision to trim its monthly $85 billion in bond buying to a more modest (but still enormous) $75 billion, that helped balloon its balance sheet to north of $4 trillion.
Suffice to say, on some levels, there was a bit of a disconnect here: The Fed’s inflation outlook showed inflation not getting back to its 2 percent target for a long time (like, forever; several years out, it was seen as just sneaking its way over 2 percent, never mind what Charles Plosser of Philly says).
With the Fed’s minutes due out later Wednesday, there are a number of unanswered questions about the Fed’s decision as Ben Bernanke exits and Janet Yellen (confirmed on a 56-26 vote, with “OMG IT’S COLD” coming in third place with 18 votes) enters the scene:
THE SCHEDULE OF REDUCING STIMULUS
There’s been no guidance on this so far. Ben Bernanke, in his final press conference as the Fed head, said he could envision a steady reduction in $10 billion increments at each meeting, which would drop the monthly buying to nothing by the end of 2014. Richard Fisher, Dallas Fed head and now a voting member for 2014, said he would be comfortable with a more accelerated rate of purchases. And dovish John Williams of San Francisco said yesterday he’d expect to see the end of buying by year-end.
So it will be interesting to see any commentary on this – whether a faster pace was considered or not. (There will probably be some boilerplate on the Fed saying it could ‘reduce at a faster pace’ or ‘resume additional purchases’ or something. Just as a warning.)
But the October minutes provide some clues, as the Fed said some participants “mentioned that it might be preferable to adopt an even simpler plan and announce a total size of remaining purchases or a timetable for winding down the program. A calendar-based step-down would run counter to the data-dependent, state-contingent nature of the current asset purchase program, but it would be easier to communicate.”
Recent inventory figures, construction data and durable goods orders point to better-than-expected figures for the fourth quarter, and a first quarter where the economy gains momentum. The baseline projection for GDP growth in the fourth quarter has been for around 2.5 percent, but it could be higher thanks to a boost in exports.
The Fed sees 2014 GDP growth of 2.8 to 3.2 percent, which may end up being optimistic, while they see inflation as not much of a threat.
Yellen, in the past, has been more explicit about the idea of living with additional inflation, if needed, to help reduce unemployment, so there’s that. Again, that central tendency only ticks up to 2 percent in 2015 and 2016, and that’s the just the upper end of the Fed’s forecasts.
THE CONSUMER OUTLOOK
October’s minutes sounded a note of caution when it came to regular people, saying that “consumer sentiment remained unusually low, posing a downside risk to the forecast, and uncertainty surrounding prospective fiscal deliberations could weigh further on consumer confidence.“
Said fiscal shenanigans have receded for the time being (give it a day or so), which has removed a layer of uncertainty, though it’s debatable that consumers make decisions based on what’s happening in Washington to begin with. But a weak September payrolls figure and a few limp sentiment surveys put the Fed in a mind to be more concerned, and later economic figures don’t show a similar kind of worry.