Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Has the Fed Run Out of Ammo?

Interest-Rates / Central Banks Nov 24, 2011 - 01:27 PM GMT

By: Ben_Traynor

Interest-Rates

Best Financial Markets Analysis ArticleThe Federal Reserve has become more in interested in what it says about policy than policy itself...

IS THIS a sign the Federal Reserve has run out of ammo?

The latest Federal Open Market Committee minutes contain a whole section on 'Monetary Policy Strategies and Communication' (the FOMC had a presentation on the subject – to have been a fly on the wall...)


Here are a few extracts, followed by a brief interpretation of what it all might mean.

First, notice how the merits of an inflation target are judged with reference to how such a target's existence might be perceived:

"Many participants pointed to the merits of specifying an explicit longer-run inflation goal, but it was noted that such a step could be misperceived as placing greater weight on price stability than on maximum employment."

Next, the FOMC grapples with the thorny issue of what might happen if the Fed made a commitment now to step in were the economy to get any worse:

"Some participants noted that conditional commitments might be particularly helpful in providing additional accommodation and mitigating downside risks when the policy rate is close to its effective lower bound, because a central bank can commit to a shallower interest rate trajectory than investors would expect if policymakers followed a purely discretionary approach. However, many pointed out that the implementation of such a strategy could pose substantial communication challenges and that the benefits would be diminished if the strategy was not fully credible."

Ah, the old credible threat problem. Let's just hope no one starts losing faith in what Bernanke and co have to say, eh?

Our next extract is positively Wittgensteinian:

"A few members expressed interest in using language specifying a period of time during which the federal funds rate was expected to remain exceptionally low, rather than a calendar date, arguing that such language might be better to indicate a constant stance of monetary policy over time."

Finally we have the FOMC's eagerly-awaited take on additional "policy accommodation" – widely taken to mean third round of quantitative easing:

"A few members indicated that they believed the economic outlook might warrant additional policy accommodation. However, it was noted that any such accommodation would likely be more effective if it were provided in the context of a future communications initiative, and most of these members agreed that they could support retention of the current policy stance at this meeting. One member dissented from the policy decision on the grounds that additional monetary policy accommodation was warranted at this time."

What are we to make of this obsession with 'Communication'?

At one level, it is perfectly reasonable for a central bank to consider – as all routinely do – how its pronouncements could have an impact on outcomes. Central bank communications – through their effect on economic expectations – have long been recognized as one of the channels through which policy is transmitted.

It seems that now, though, the Fed has gone a step further, and made 'Communication' the star of the show. Is this because it is now the only policy tool it has left? Have US monetary policy decisions been reduced to decisions about 'language', tone of voice, and whether or not to raise an eyebrow at a particular point in a press conference?

This is a bit facetious, granted – but there is some merit to the idea that the Fed may be tapped out. Interest rates are as low as they can go. And the issue now is not whether or not they should be raised again, but how best to convince everyone that they are never ever going higher.

As for more "accommodation", the perceived failure of the first two rounds has made QE3 politically very hot. One gets the sense that the Fed now hopes to raise inflationary expectations – and thus stimulate economic activity (a contentious assumption in itself, but we'll leave that for another day) – by merely hinting that QE3 will happen, in the hope of never having to actually do it.

A word of caution therefore to those expecting QE3 is a sure thing. Central banks have a clear incentive to say one thing and do another. Influencing expectations is, as we have seen, a core part of their business. Just because these minutes may sound accommodative in tone does not, ipso facto, mean QE3 is round the corner.

Nonetheless, sooner or later the Fed – as it acknowledges – risks running into a credibility problem. If they 'threaten' QE3 but then don't do it, could that entrench the very deflationary expectations the Fed hopes to expunge?

One FOMC member (Charles Evans) seems very keen to avoid this scenario, voting for more accommodation right now. The longer he is outvoted, the more the impression will grow that the Fed has indeed run out of feasible policy options. One can only imagine how the markets will feel about that.

By Ben Traynor
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules