Fed Statement: A Change in Guidance?

This was expected to be a pretty dull FOMC decision, but there’s one really interesting detail in the statement:

“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.”

There’s no more “accommodative” until “at least” 2015 in there.  That means the guidance has been totally shifted.  And the potential is that the Fed becomes much tighter far sooner than most might expect.  Of course, that assumes the economy doesn’t encounter any hiccups between now and a 6.5% unemployment rate, but with the unrate at 7.7% the Fed has given itself a bit more room to operate.  That’s probably a good move.  Especially if Dr. Bernanke isn’t going to be around past 2013….


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. I don’t the guidance has been totally shifted. As the sentence after the bold says, they think it is consistent with the earlier date-based guidance.

    Its probably the same as the Taylor rule. Why don’t they appoint the Taylor rule as the Fed and retire the current dumbos at the Fed?

  2. so no need for any further FOMC meetings next couple of years?
    (assuming that inflation expectations and unemployment rate stay above/below their targets)

  3. Cullen,

    Interesting situation they’ve created……

    1. The fed and their beneficiary banks have always benefited from a misrepresentation lower of inflation….that doesn’t change with this announcement. (I’m not opening another debate about accuracy of inflation calculations, just using common sense….does anyone believe the fed/bls would misrepresent inflation higher than actual with so many govt expenses linked to inflation? So the BEST behavior you can possibly hope for is an accurate inflation rate, and its not logical to expect BEST possible behavior out of conflicted agencies.)

    but the more interesting dilemma…..

    2. Up to now incumbent govt has benefited from a misrepresentation lower of unemployment…..(same here, I’m just using common sense…with all the expired-benefits people and frustrated-and-quit-looking people subtracted from the calculation, no honest person can believe the current 7.7%). But now the banks would benefit from a misrepresentation of unemployment HIGHER, and continuation of reserve handouts.

    It will be interesting to see how this one is fought down the road.

    Going further……

    With Indirect buying of bonds at auction continuing to tank, and no sign of fed stepping back from buying all/almost all higher maturity issuance out of the secondary market, what will have to happen for you to come off your position that there is in no way at least a little of the dreaded “m” word going on? :) krb

  4. Gotta love a Federal Reserve Chairman working completely against the President of the United States……. I think the analogy is pissing on someones head and calling it rain!

  5. The fed’s forecast, as bad as they have been, have unemployment staying above 6.5% until mid 2015. Hence in reality it is no change at all. They just changed words from a date to an event.

    Further he (or Yellen next) can move goalposts at will. Whose to say they won’t say 5.5% in 3 years – it’s all just a parlor game at this point.

    Last, he said 6.5% is just a signpost – it doesnt mean they change policy there. Hence it means nothing.

  6. How do work that one out then?

    $40bill of MBS junk + $45bill on UST junk = $85bill per month.

    And guess what the primary dealers are obliged to bid on?
    Yes, US treasuries.

    It’s just a circular way for the Fed to boost base money reserves at the banks, so they can feed it back to fund the deficit.

    And it’s becoming essential, as the indirect bidders (overseas govts) appear to be deserting UST auctions in their droves of late.

    But Uncle Barack and Uncle Bernanke will keep the charade going, hope no one notices, and eventually succeed with their great plan to pay back the US deficit, every penny of it.

    At a point in time when one thousand dollars might (or not) buy you a loaf of bread.

    Not long now…..

  7. We know Gary. The hyperinflation is coming. Can you wake me up when it arrives. I want to make sure I don’t miss it. But for now I am going back to sleep. I am tired from being so right about these big macro calls. :-)

  8. Apart from your skills at macro calls, we can add modesty and sarcasm to the list of your boundless talents. Sweet dreams.

  9. Gary, which is more arrogant? Me pointing out where I’ve been right (in an attempt to create a teachable moment) or you continually saying the same things based on the same misunderstandings? I am here to help, but you refuse to listen to my views….That’s fine, but please don’t call me arrogant when I spend countless hours simply teaching people and helping them understand how this all works. Being right matters. It shows that someone has developed a solid grasp of underlying dynamics. If you think I am being arrogant then fine. Personally, I think it’s far more arrogant to remain wrong and not admit it than to be right and discuss it openly (usually explaining why that’s been the case so others can also learn from it).

  10. Ah, I note you ignored the sarcasm comment (lowest form of wit apparently).

    I responded to a comment from a poster. As usual you jump in with a personal attack, ignore the facts stated, hence demonstrating certain personality traits.

    Meanwhile, others far brighter than me are waking up to certain risks, whilst you and your MMT clan dream of endless printing. All that I wonder is whether you’ll have the nerve to switch sides and claim to have been right again when it all comes crumbling?


    And I am not interesting in debating with you, because you are as slippery as a snake in not keeping to the point. Typical bond salesman eh?

  11. You just pinched the name. Monetary Realism has been around for around 6,000 years, and all governments hate it.

    You will see.

  12. How can governments hate something that just describes how their monetary systems work? that’s like hating yourself for understanding how your brain works…

  13. Ok, I have 5 minutes to waste.

    Monetary realism is being experienced in Greece, Spain and Portugal.

    It is being ignored in America, the UK, and Japan.

    The outcomes are very different no?

    And in the first case we have an independent money issuer, beholden to no state, with one mandate, currency stability.

    In the other three we have central banks with withering independence, feeding the govt spending machine.

    One must ignore history to see what is happening to ignore the growing risks of currency collapses. You have demonstrated that you have zero knowledge of monetary history, how we got to where we are today, gold’s role in the monetary sphere, or geopolitical changes that guarantee a new monetary system, and the demise of the dollar.

    I suspect you ignore all of the above because it would cost you business to confront these issues, that scares you, so you ignore them. But your ignorance in these areas will cost you and your clients dear.

    Perhaps you need the services of a monetary expert acting as a consultant for Orcam maybe, so you can cover all of the bases?

  14. “with all the expired-benefits people … subtracted from the calculation, no honest person can believe the current 7.7%).”

    Quit Lying.
    The question that the BLS asks is “Have you looked for work in the last 4 weeks”. As long as you are sending out resumes, you are counted.

    “frustrated-and-quit-looking people” are a different story.