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19 Sep 2013
Forget the quality, feel the width (of Bernanke’s loose policies)
FXstreet.com (London) - If nothing else, yesterday’s shock decision by the FOMC represents a communication breakdown. Especially when “forward-guidance” is all the rage among central bankers. That ultra-dovish Fed chairman Ben Bernanke made the decision to maintain ultra-loose monetary policy should not be a surprise to markets. But in a market where price mechanisms have been distorted beyond use by central bank interventionism, the communication failure will not have done the Fed any favours.
It had been expected that the Fed would taper its monthly purchases by USD10bn. But instead Bernanke announced that it would continue with its USD85bn monthly programme. In his defence of the maintenance of the status quo, Bernanke focussed on unfavourable market interest rate conditions.
“Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further.” In addition, despite any drags on the labour market diminishing, any strengthening of labour market conditions remains fragile and “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.” Bernanke maintained that by continuing full steam ahead with Treasury and MBS purchases, open-ended QE “ should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”
The Fed maintained an extremely dovish position on rate hikes with projections focussing on 2015. The 2015 median forecasts were also revised downwards to 0.75 percent from 1 percent.
Declining quality of the labour market
Bernanke also went on to underline that the previously stated 6.5 percent unemployment rate threshold for an interest rate hike is not a trigger point, and that other conditions would need to be met, iterating that the rate would have to fall significantly lower than this point. This could be seen as an acceptance that while there has been some stabilisation of the headline rate of employment, the quality of the US labour market as been destroyed in recent years, with many of the jobs created in the key monthly non-farm payrolls coming from part-time and underemployed workers. Seasonally adjusted earnings for production and nonsupervisory employees on private non-farm payrolls rose by just 0.1 percent in August to USD8.78 from USD8.85 when the US left the technical recession in June 2009. The language used by Bernanke yesterday suggests that, while inflation remains under control, he can continue with his ultra-loose monetary policy to attack the Fed mandate to improve labour market conditions.
10-year US Treasuries have held at 2.70 percent after shedding 16bps on yesterday’s announcement.
5-year US Treasuries have fallen a further two basis points since the London open after shedding 18bps yesterday. They currently stand at 1.41 percent.
It had been expected that the Fed would taper its monthly purchases by USD10bn. But instead Bernanke announced that it would continue with its USD85bn monthly programme. In his defence of the maintenance of the status quo, Bernanke focussed on unfavourable market interest rate conditions.
“Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further.” In addition, despite any drags on the labour market diminishing, any strengthening of labour market conditions remains fragile and “the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.” Bernanke maintained that by continuing full steam ahead with Treasury and MBS purchases, open-ended QE “ should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”
The Fed maintained an extremely dovish position on rate hikes with projections focussing on 2015. The 2015 median forecasts were also revised downwards to 0.75 percent from 1 percent.
Declining quality of the labour market
Bernanke also went on to underline that the previously stated 6.5 percent unemployment rate threshold for an interest rate hike is not a trigger point, and that other conditions would need to be met, iterating that the rate would have to fall significantly lower than this point. This could be seen as an acceptance that while there has been some stabilisation of the headline rate of employment, the quality of the US labour market as been destroyed in recent years, with many of the jobs created in the key monthly non-farm payrolls coming from part-time and underemployed workers. Seasonally adjusted earnings for production and nonsupervisory employees on private non-farm payrolls rose by just 0.1 percent in August to USD8.78 from USD8.85 when the US left the technical recession in June 2009. The language used by Bernanke yesterday suggests that, while inflation remains under control, he can continue with his ultra-loose monetary policy to attack the Fed mandate to improve labour market conditions.
10-year US Treasuries have held at 2.70 percent after shedding 16bps on yesterday’s announcement.
5-year US Treasuries have fallen a further two basis points since the London open after shedding 18bps yesterday. They currently stand at 1.41 percent.