Two thirds
of the Wall Street economists polled either by Bloomberg or ThomsonReuters were
wrong. The FOMC did not start tapering at its September meeting. Now many of
those economists, but also strategists and even some traders and fund managers
talking to the media behave like bad traders, which blame others for their
losses. In this case, they blame the Fed for misguiding them. However, this criticism
of the FOMC is unfounded and unfair. Those, who have bet on tapering in
September, should better carefully analyze which mistakes they made in
misinterpreting the FOMC statements.
When Fed
chairman Bernanke made the famous statement at the Congress testimony in May,
he used the simple conditional form. However, it can be observed times again
and again that some persons, among which are also journalists, have
difficulties to make the right distinction between the simple conditional and
the simple future form. Many analysts, economists and journalists interpreted
the sentence that the FOMC might decide at one of the next few meetings to
reduce the volume of bond purchases as that the FOMC will make the decision.
Furthermore, the expression next few meetings was reduced to the next three
meetings and thus, many just concluded that the FOMC will taper in September.
However,
the intention of Mr. Bernanke was just to prepare the market for an event which
was a possible outcome of the discussions within the FOMC. But the decision was
still open. Reading carefully the FOMC statements and the comments made by Fed
chairman Bernanke and some other voting members of the FOMC, it was clear,
there was no pre-commitment to decide to taper at the September FOMC meeting.
Former ECB president Trichet used to emphasize at each ECB press conferences
that the ECB was not pre-committed. But even if Mr. Bernanke had pointed out again
and again that the FOMC was not pre-committed to taper in September, there would
have been still some traders, fund managers or economists who did not get the
message and then complaint about being misguided by the Fed.
The FOMC
always emphasized that the decision concerning tapering the volume of bond
purchases would be data dependent. However, the FOMC never stated that a
certain level of the unemployment rate would automatically lead to a reduction
of bond buying. Furthermore, the data set relevant for the FOMC decisions also
includes the Fed projections for GDP growth and inflation, which a central bank
should take into account due to the impact lags of monetary policy. Again, some
commentators now complain that the FOMC has revised its projection for GDP
growth lower for this year by 0.3 percentage points and that this downward
revision is a further argument for not tapering.
Some
commentators also criticized that data dependency includes the change in
financial market conditions, which occurred after Fed chairman Bernanke pointed
out the possibility of tapering at the testimony on May 22, 2013. However, the
FOMC cannot ignore the rise on yields on US Treasury notes and bonds as well as
on mortgage bonds. If financial markets overshoot on the announcement of a
possible action, then these markets should not be surprised that the possibility
does not became reality. However, it is not the Fed to blame. Economists and
traders just ignored that the market reaction could have a feed-back impact on
the FOMC decision. Those, economists and traders who got the FOMC wrong have to
do just a better job.
Data dependency
also includes to consider future risks. One of these future risks is the US
fiscal policy and that politicians tend to make the same mistake not only twice
but several times. The Tea Party fraction of the House Republicans is again
following an all or nothing policy and is unwilling to make a compromise. They
risk again that the US might default on the Treasury debt. Such an event would
have huge negative impacts on the US economic activities. Thus, prudent
monetary policy just takes a wait and see attitude before reducing the monetary
stimulus.
We pointed
out several times that the publicly available data for the labor market and
price development were sufficient reasons for not tapering in September. The
further arguments provided by the FOMC does not make the Fed policy
unpredictable. As Lord Keynes once stated: “If the facts change, I change my
mind. And what do you do, Sir?” The FOMC always made it quite clear that they
would act like Lord Keynes by emphasizing again and again that the decision to
taper is data dependent. Those, who got the FOMC wrong have obviously ignored
to take changing facts into their analysis.
For the
yield on 10yr US Treasuries, we stated that they would be very attractive at a
level around 3% as the Fed Funds rate would remain at the extremely low level
for some time, even after the Fed starts to reduce the volume of bond
purchases. We came close to this level. After the recent FOMC decision, yields
came down to 2.75%. Also at this level we regard 10yr T-notes still as a buy.
It appears that the FOMC would prefer yields to be more in the vicinity of 2.5%
before tapering.
Gold and
other precious metals rallied after the FOMC announcement, but pared gains on
Friday and even closed down in the week over week comparison. The market
speculates now that the FOMC would taper at the next meeting. While it is also
not yet a done deal that the FOMC will lower the volume of bond purchases in
October (observe the risk stemming from the fiscal policy for the US economy)
the commodity markets react like the decision has already been made. But the
FOMC is not pre-committed. Nevertheless, the market reaction strengthens our
assessment that precious metals remain trading sideways and that the upside
potential is capped for the time being.
No comments:
Post a Comment