Thu, Mar 28, 2013Known unknowns post-Fed meeting
In the wake of last week’s Fed meeting, press conference from Federal Reserve Chairman Ben Bernanke and Monday’s major policy address from New York Fed President William Dudley, here’s what we still want to know about Fed policy.
What would trigger a decision by the Fed to slow down the pace of asset purchases?
Bernanke suggested the Fed will taper when it sees lasting improvement in a range of key labor market indicators and in the Fed’s outlook for those indicators, said Matthew Hornbach, head of U.S. interest rate strategy at Morgan Stanley. Hornbach said he wasn’t more worried about an earlier start to tapering than prior to the FOMC meeting, but the risk may have risen in the market’s eye.
What would trigger a decision by the Fed to stop asset purchases altogether?
The Fed has said it will not end asset purchases until it sees a “substantial improvement” in the labor market. But what constitutes a substantial improvement?
The list of labor market indicators Bernanke and Fed Vice Chairman Janet Yellen have said they are looking at include the unemployment rate; payroll employment, the hiring rate; layoffs/discharges as a share of total job separations; the “quits” rate as a share of total job separations; and spending and growth in the economy.
What is clear that the “center of gravity” at the Fed does not believe “substantial improvement” test has not been met, said John Canally, chief economist at LPL Financial Services.
If the Fed decides to taper, what will they slow down, Treasury purchases first, mortgage-backed securities first or both at the same time?
At the moment, the Fed is buying $40 billion of mortgage-backed securities and $45 billion of Treasurys per month. The Fed has not given any guidance on what they would cut back, and have given no guarantees that they are going to keep buying either sector, noted Thomas Simons, money market economist at Jefferies & Co. Inc.
Has the Fed revamped its exit strategy principles?
Economists have a myriad of questions about the exit strategy. Bernanke has promised to update the June 2011 outline of the exit plan but there was no hint when the revamp might come. “I don’t think we will get it at this meeting, but we will at some point,” Simons said.
Some clues to these questions may come in the minutes of the Fed meeting to be released on April 10.