FOMC Minutes Reveal Taper Likely In "Coming Months"

aWith the schizophrenia that seems to have availed across the FOMC members (hawks are doves, doves are hawks, tapering is not tightening, etc.) it is not surprising that the minutes reflect some confusion:*FOMC SAW `SEVERAL SIGNIFICANT RISKS' REMAINING FOR ECONOMY *FED TAPER LIKELY IN COMING MONTHS ON BETTER DATA, MINUTES SHOW*METLIFE FOUNDATION, SESAME WORKSHOP PARTNER TO PROVIDE FINL*FOMC SAW DOWNSIDE RISKS TO ECONOMY, LABOR MARKET `DIMINISHED'*FOMC SAW CONSUMER SENTIMENT REMAINING `UNUSUALLY LOW'*FOMC SAW RECOVERY IN HOUSING AS HAVING `SLOWED SOMEWHAT'So summing up - when we get to an unknown point in the future with an unknown state of parameters, we may do an unknown amount of tapering - maybe possibly. Pre-Minutes: SPX 1791, 10Y 2.75, EUR 1.3444, Gold $1262Key sections: on taper in coming months as well as a Taper even if there is no economic improvement:During this general discussion of policy strategy and tactics, participants reviewed issues specific to the Committee’s asset purchase program. They generally expected that the data would prove consistent with the Committee’s outlook for ongoing improvement in la-bor market conditions and would thus warrant trim-ming the pace of purchases in coming months. However, participants also considered scenarios under which it might, at some stage, be appropriate to begin to wind down the program before an unambiguous further improvement in the outlook was apparent.on the calendar scheduling of the taper:Participants generally expressed reservations about the possibility of introducing a simple mechanical rule that would adjust the pace of asset purchases automatically based on a single variable such as the unemployment rate or payroll employment. While some were open to considering such a rule, others viewed that approach as unlikely to reliably produce appropriate policy out-comes. As an alternative, 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 and might help the public separate the Committee’s purchase program from its policy for the federal funds rate and the overall stance of policy. With regard to future reductions in asset purchases, participants discussed how those might be split across asset classes. A number of participants believed that making roughly equal adjustments to purchases of Treasury securities and MBS would be appropriate and relatively straightforward to communicate to the public. However, some others indicated that they could back trimming the pace of Treasury purchases more rapidly than those of MBS, perhaps to signal an intention to support mortgage markets, and one participant thought that trimming MBS first would reduce the potential for distortions in credit allocation.on lowering the IOER:Participants also discussed a range of possible actions that could be considered if the Committee wished to signal its intention to keep short-term rates low or rein-force the forward guidance on the federal funds rate. For example, most participants thought that a reduc-tion by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage, although the benefits of such a step were generally seen as likely to be small except possibly as a signal of policy intentions. By contrast, participants expressed a range of concerns about using open market operations aimed at affecting the expected path of short-term interest rates, such as a standing purchase facility for shorter-term Treasury securities or the pro-vision of term funding through repurchase agreements. Among the concerns voiced was that such operations would inhibit price discovery and remove valuable sources of market information; in addition, such operations might be difficult to explain to the public, complicate the Committee’s communications, and appear inconsistent with the economic thresholds for the fed-eral funds rate. Nevertheless, a number of participants noted that such operations were worthy of further study or saw them as potentially helpful in some cir-cumstances.On lowering the 6.5% unemployment rate threshold:As part of the planning discussion, participants also examined several possibilities for clarifying or strength-ening the forward guidance for the federal funds rate, including by providing additional information about the likely path of the rate either after one of the economic thresholds in the current guidance was reached or after the funds rate target was eventually raised from its cur-rent, exceptionally low level. A couple of participants favored simply reducing the 6½ percent unemployment rate threshold, but others noted that such a change might raise concerns about the durability of the Com-mittee’s commitment to the thresholds. Participants also weighed the merits of stating that, even after the unemployment rate dropped below 6½ percent, the target for the federal funds rate would not be raised so long as the inflation rate was projected to run below a given level. In general, the benefits of adding this kind of quantitative floor for inflation were viewed as uncer-tain and likely to be rather modest, and communicating it could present challenges, but a few participants re-mained favorably inclined toward it. Several partici-pants concluded that providing additional qualitative information on the Committee’s intentions regarding the federal funds rate after the unemployment thresh-old was reached could be more helpful. Such guidance could indicate the range of information that the Com-mittee would consider in evaluating when it would be appropriate to raise the federal funds rate. Alternative-ly, the policy statement could indicate that even after the first increase in the federal funds rate target, the Committee anticipated keeping the rate below its longer-run equilibrium value for some time, as eco-nomic headwinds were likely to diminish only slowly.Full minutes (pdf)Average: Your rating: None Average: 4 (1 vote)

Goldman's FOMC Post-Mortem: "Relatively Neutral" But "December Taper Possible"

aConsidering Jan Hatzius and NY Fed's Bill Dudley are close Pound & Pence drinking buddies, when it comes to assessing what the Fed "meant" to say, one should just throw the embargo-minutes penned Hilstanalysis in the garbage and just focus on what the Goldman chief economist thinks. His summary assessment: the minutes were relatively neutral, March is the most likely first taper date although "December is still possible."From Goldman:We see the October FOMC meeting minutes as relatively neutral. Members generally did not appear to believe that tapering would be warranted in the immediate term at the time of the meeting, although that was before some recent better-than-expected data. There was discussion of potential enhancements to the forward guidance, but no consensus. We continue to think that March is the most likely date for the first reduction in asset purchases, although December is still possible. MAIN POINTS:1. With respect to the forward looking outlook for asset purchases, the minutes stated "some [members] pointed out that, if economic conditions warranted, the Committee could decide to slow the pace of purchases at one of its next few meetings." In contrast, participants?including non-voting regional Presidents?generally felt that trimming the rate of purchases would likely be appropriate "in coming months." However, ever the more hawkish language describing participants' views represents a change from the September minutes, in which "most" thought that it would be appropriate to begin reducing the pace of asset purchases by the end of the year. Also suggesting a lack of appetite for near-term tapering, "a number of participants noted that recent movements in interest rates … suggested that financial markets viewed … asset purchases and forward guidance ... as closely linked." However, December remains on the table as a possibility, in particular given stronger incoming data since the October meeting. 2. Participants seemed unenthusiastic about adopting a mechanical rule tying the pace of purchases to a single variable such as the unemployment rate. Some suggested announcing a total size of remaining purchases or a timetable for winding down the program as an alternative. Regarding the composition of tapering, "a number believed that making roughly equal adjustments to Treasury and MBS purchases would be appropriate," suggesting a stronger preference for equal tapering of Treasuries and MBS than that expressed in prior minutes. 3. On potential future enhancements to the forward guidance, "a couple" participants noted the merits of simply reducing the current 6-1/2% unemployment rate threshold, although others noted concerns about such a change. Others brought up the possibility of an inflation floor, although the benefits of such a change were viewed as "uncertain and likely to be rather modest." Several participants concluded that providing more qualitative information regarding the Committee's intentions after the threshold was reached could be most helpful. Overall, we see this discussion as representing a lack of consensus at the time of the October meeting on how the forward guidance should be adjusted in the future. 4. The minutes also noted that "most participants" thought that a reduction in the interest rate paid on excess reserves was "worth considering at some point" although the benefits of such a step were "generally seen as likely to be small except possibly as a signal of policy intentions."

Did Bill Dudley Just Unveil The Fed's Real Taper "Scapegoat" Plan?

aThat the Fed has a problem is increasingly well known - despite the blather from the mainstream media that QE monetization can continue ad infinitum. Their problem, of course, is running out of government-provided liabilities to monetize (as deficits shrink and their ownership of the entire Treasury complex surges). They face other problems (as we have noted before) but the admission that they are boxed in would have major ramifications in the market's faith. So, how does the Fed, faced with the knowledge that they have created asset bubbles, broken the bond market, and are boxed in by their own excess still meet the market's undying desire to keep the flow going? Bill Dudley just, perhaps inadvertently, dropped a hint of the next 'market/scapegoat' for monetization - Student loans.Bear in mind that the "taper" is all about economic cover for a forced move the Fed has to make, because:1. Deficits are shrinking and the Fed has less and less room for its buying2. Under the surface, various non-mainstream technicalities are breaking in the markets due to the size of the Fed's position (repo markets, bond specialness, and fail-to-delivers among them).3. Sentiment is critical; if the public starts to believe (as Kyle Bass warned) that the central bank is monetizing the government's debt (which it clearly is), then the game accelerates away from them very quickly - and we suspect they fear we are close to that tipping point4. The rest of the world is not happy. As Canada just noted, the US monetary policy will be discussed at the G-20Simply put, they are cornered and need to Taper; no matter how bad the macro data and we are sure 'trends' and longer-term horizons will come to their rescue in defending the prime dealers' clear agreement that it is time...So they need a scapegoat!*DUDLEY SEES `VERY RAPID RISE IN STUDENT LOAN DEBT'Yes - Mr. Dudley - Very Very Rapid indeed...As we recently noted, student and car loans are responsible for 99% of all consumer credit created this year.Thank you Uncle Sam for making yet another generation of indentured servants who are studying geology on the taxpayers' dime, who will never get a job, who are up to their neck in debt, but at least can afford a Chevy Silverado.And while the Fed itself is responsible for the $1trillion bubble that has grown in easy cheap student loan debt...as the NY Fed disclosed moments ago, federal student loans officially crossed the $1 trillion level for the first time ever. Notably: the quarterly student loan balance has increased every quarter without fail for the past 10 years!It would appear Mr. Dudley is getting the joke that a younger generation burdened with debt is a problem...*DUDLEY: RISE IN STUDENT LOAN DEBT COULD IMPAIR ECONOMIC OUTLOOKand, as we notd here,  the delinquency rate on student loans is soaring and has just hit an all time high of 11.83%, an increase of almost 1% compared to last quarter. Even according to just the government lax definition of delinquency, a whopping $120 billion in student loans will be discharged. Thank you Uncle Sam for your epically lax lending standards in a world in which it is increasingly becoming probably that up to all of the loans will end up in deliquency.and furthermore, as we noted here, of the 28 million Americans with federal student loans, 60%, or 17 million, don't pay the US government a single cent! Hopefully this highlights just how acute the severity of the student loan bubble is when stripped of all spin and mitigating rhetoric.########################So where does that leave us?1. The Fed knows it needs to taper at some point - no matter what the rhetoric, unless the Fed admits the US is still in crisis mode, it risks losing its credibilit entirely (and control of the bond market) if it does not taper.2. Smaller deficits mean the Fed is boxed in with its ability to monetize Treasuries and keep the "flow" flowing...How to escape that box?1. Identify a bubble (but it cannot be an asset-bubble because if it were then the collateral chains and rehypothecation would contagiously collapse every other asset class).2. Scapegoat that 'Bubble' as potentially a headwind for growth that needs to helped by government intervention.3. "Help" the people by monetizing that bubble (and implicitly keeping the "flow" flowing)The Answer - as Bill Dudley just opined - is Student Loans.1. A perfect bubble (forget about who created it) that needs to be popped by a responsible overseer2. Lots of debt to monetize (keep the "flow" flowing)3. A perfect excuse to slow Treasury buying (economy stabilizing, jobs stabilizing, stocks doing well)4. A voter-friendly way of "helping" those in need that does nothing but enable more flow.How will they monetize Student Loans? No one is sure yet, but Dudley's comments on Human Capital*DUDLEY: `BUILDING HUMAN CAPITAL' IMPORTANT FOR FUTURE ECONOMYmake one think of the book "The Unincorporated Man"The Bottom Line - Bill Dudley just floated a strawman that the Fed will taper Treasuries and the scapegoat will be Student Loans - which they will directly monetize to save us all from ourselves (and the problem they created).(as an addenda - we warn of the unintended consequence of this action - should they do it - that will merely encourage banks to securitize student loans and flip them to the government en masse, creating demand for moar student loans and enabling supply - ths growing the bubble ever larger).Average: Your rating: None Average: 4.8 (16 votes)