Monday, June 17, 2013

Hilsenrath Rally
Today’s stock market rally was widely attributed to an article that the WSJ’s Fed watcher posted on Sunday afternoon titled, “Economists Wary as Fed's Next Forecast Looms.” It’s strange that Mr. Bernanke and his colleagues seem to regularly need to clarify what they intend to do through Mr. Hilsenrath. Why not just communicate with the markets directly? The problem is that when Bernanke & Co. do so, they confuse the markets so much that Hilsenrath is often tapped to provide an off-the-record interpretation to clear up the confusion.

Ironically, in his latest article, Hilsenrath reported that in a recent survey of economists, on a scale of 0-100 for communication, the average grade among all the “respondents is a 62, a D-minus at best. Last August, the average grade was a much more respectable 75.”

The basic message conveyed in Hilsenrath’s latest article is that Fed officials, who were relatively optimistic about the economic outlook in their March projections, could signal they might begin pulling back their QE program later this year if they remain optimistic at the meeting that starts tomorrow and ends Wednesday. Let’s review their March outlook:

(1) GDP forecast. In March, the central tendency of their forecast for real GDP was 2.3%-2.8% for this year and 2.9%-3.4% next year.

(2) Unemployment forecast. Their central tendency for the unemployment rate was 7.3%-7.5% this year and 6.7%-7.0% next year. They don’t expect the jobless rate to fall to 6.5% until 2015.

(3) Inflation forecast. The central tendency for the core PCE inflation rate was 1.5%-1.6% this year and 1.7%-2.0% next year.

In the December 12, 2012 FOMC statement, the FOMC declared for the first time that the “exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent…” No specific promises were made to keep QE going until that target is achieved.

So allow me to join Hilsenrath and all the other Fed watchers who are trying to clearly communicate the Fed’s policy position on behalf of the Fed: The federal funds rate will remain near zero until the unemployment rate drops to 6.5%. If the jobless rate continues to head in that direction, the FOMC most likely will vote to scale back the Fed’s bond purchases before the end of the year, but not at the meeting that starts today and ends tomorrow.
(Based on an excerpt from YRI Morning Briefing)

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