Ethan Harris and the Bank of America Merrill Lynch US Economics team go out on a limb in saying the market may be misinterpreting yesterday’s Fed minutes…
Caution from the Committee
While Fed officials seemed to be overall confident in the recovery, some cracks
appeared relative to their June meeting. For example, they acknowledged
uncertainty in the outlook from the sequester. They noted the disconnect between
the unemployment rate and “other measures of labor utilization.” And while “a
few” participants still thought that low inflation was transitory, “a number” worried
that it was a sign of persistently low demand and thus warranted continuing with
accommodation. These do not suggest an eagerness to taper soon, in our view.
Guiding toward a guidance change
The Committee debated guidance on two fronts: asset purchases and interest
rates. On the former, they decided not to say anything, judging it “might prompt
an unwarranted shift in market expectations regarding asset purchases.”
Participants seemed content that markets understood the data-dependent nature
of QE, although “a few” warned against putting too much attention on the
“illustrative” 7% unemployment rate Bernanke mentioned in his press conference.
As for rates, “several” said they were “willing to contemplate lowering the
unemployment rate threshold,” and “one” wanted formal lower bounds on
inflation. While we don’t anticipate either of these changes occurring soon, the
Committee clearly is grappling with communication challenges.
Josh here, also keep in mind we’ve seen yields spike higher of their own volition since this congregation in late July and mortgage re-fis are now dropping precipitously. Perhaps the Fed lays off in September after all – but how will the markets take that? I’d guess that no taper in September would mean an initial rally followed by massive pessimism and even more selling.
We shall see…