So, what’s the Fed going to do?

by
Fed

The last time I wrote a story about the topic of parsing the Federal Reserve’s signals, it was rightly pointed out that I used stories too early in the day. So, I waited until after newspaper deadlines to look at the coverage in order to be fair. But the media’s focus was also vastly different.

The Bloomberg story ran under the headline “FOMC Minutes Show Broad Support for Tapering Timeline,” highlighting that they’re likely to pull back from stimulus plan this year:

Federal Reserve policy makers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start reducing bond buying later this year if the economy improves, with a few saying tapering might be needed soon, minutes of their last meeting show.

“Almost all committee members agreed that a change in the purchase program was not yet appropriate,” and a few said “it might soon be time to slow somewhat the pace of purchases as outlined in that plan,” according to the record of the Federal Open Market Committee’s July 30-31 gathering released today in Washington.

“A few members emphasized the importance of being patient and evaluating additional information on the economy before deciding on any changes to the pace of asset purchases,” the minutes show. “Almost all participants confirmed that they were broadly comfortable” with the committee moderating “the pace of its securities purchases later this year.”

Debate among Bernanke and his colleagues over when to taper $85 billion in monthly bond buying has roiled financial markets from Jakarta to Mumbai to New York. Some Fed officials have said the bond purchases, while helping reduce unemployment, are stoking excessive risk taking in assets such as junk bonds and leveraged loans.

“They’ll probably start to taper in September,” said Josh Feinman, the New York-based global chief economist for Deutsche Asset & Wealth Management, which oversees $400 billion. “They know that that’s widely anticipated, and they haven’t done anything to deflect those expectations.”

The New York Times headline was “No Clarity From Fed on Stimulus, Upsetting Wall St.” and the story focused on the fact that the Fed didn’t spell out its plans clearly, keeping everyone guessing:

The confusion over exactly when the Federal Reserve will begin scaling back its huge economic stimulus efforts only deepened Wednesday, with the release of a summary of the deliberations at the central bank’s last meeting in late July.

There were hints that some members of the divided committee are comfortable with beginning to ease the Fed’s program of buying $85 billion a month in government bonds and mortgage securities as soon as their next meeting in mid-September. But there were also indications that another camp within the policy-setting group favors waiting until December, or even later.

The only thing that was clear is that the Fed intends to keep Wall Street — and the rest of the world — guessing.

For one thing, a number of participants at the Federal Open Market Committee raised concerns that economic growth in the second half of the year would prove disappointing, which would tend to encourage them to delay any changes in their current policy,

In June, the Fed’s chairman, Ben S. Bernanke, indicated the stimulus program could be scaled back this year if economic data continued to be relatively positive. But he avoided setting any target dates to begin what many investors refer to as the Fed’s coming “taper.”

The minutes of the meeting did little to clarify the issue. While “a few members emphasized the importance of being patient and evaluating additional information before deciding on any changes to the pace of asset purchases,” a few others “suggested that it might soon be time to slow somewhat the pace of purchases,” the summary of the July 30-31 meeting said.

Then there was the Wall Street Journal story, which ran under the title “Fed Stays the Course on Bond Buying”:

Federal Reserve officials reaffirmed their plan to try winding down an easy-money program that has charged up global markets but left investors on tenterhooks about when or how aggressively they would move.

Minutes of the Fed’s July 30-31 policy meeting, released Wednesday, suggested officials were on track to start winding down the $85 billion-a-month bond-buying program, possibly as early as September, if the economy strengthens as they expect.

They were, however, a bit more uncertain than in June about whether economic growth would pick up as they forecast and about the gains they were seeing in the job market.

Reflecting the cautiousness shown in the minutes and their own uncertainty about how the economy will perform in the months ahead, some Fed officials have begun talking about making a small move when they do start pulling back on bond buying. “If you’re very uncertain about how strong the improvement in the economy is, and how self-sustaining, then you should move in fairly small increments,” Eric Rosengren, president of the Federal Reserve Bank of Boston, said in an interview Wednesday with The Wall Street Journal.

So yet again, the Federal Reserve is leaving investors guessing as to if and when they’ll begin pulling back from the stimulus plan. Looks like journalists are also struggling to determine what’s going to happen.