The Fed Is Now So Divided, Members Can’t Even Agree On The Meaning Of The Word ‘Low’…(“Depends Moment” in 3…2…1)
June 23, 2012
According to Morgan Stanley’s Vincent Reinhart, deep rifts are being exposed.
Despite this dual shortfall, the Fed’s response is modest and incremental. It has extended its program to increase the average maturity of its holdings. They will “twist” some more, like they did last autumn, but only through year-end. Moreover, the Fed will only swim in the safest end of the fixed income waters—the Treasury market. They will purchase and sell about $267 billion of Treasury securities through year-end, buying at longer maturities and selling at shorter ones to keep the overall size of the balance sheet constant.
Bottom line, this was the path of least resistance—acting because market participants expected something but not acting much.
This suggests that the Fed is divided, doesn’t want to draw attention to itself right now, or doesn’t think that its remaining levers are very effective.
As for evidence of problematic group divisions, consider the forecast of the appropriate policy rate for the next few years. The range of views of policymakers as to where the funds rate will be at the end of 2014 spans from zero to 3 percent. Line this up with the statement: Eleven FOMC members agreed to a statement that the funds rate would still be low by late 2014, but only six forecast an unchanged funds rate by then. That is, they do not agree on the definition of the word “low.”