Recap 9-27-12: The Future of Fed Policy

Commentary:

There has been some additional discussion of possible next steps for the Fed. Columbia’s Woodford proposed at Jackson Hole that the Fed should announce a policy of continuing asset purchases until Nominal GDP hits a certain moving target that tracks potential GDP. Since then, various brokerage desks and blogs have been discussing this in earnest, with most concluding that the adoption of such a policy would have a substantial positive impact on dollar denominated assets.

It should be noted, however, that the Fed has already adopted an open ended QE program with undefined exit conditions. In other words, the FOMC may very well have already decided internally that it will de facto be targeting NGDP.

Note that there are many hazards with publically announcing an NGDP target. A very serious risk is that members of congress could charge that the Fed has strayed from its mandate (of maximizing employment and containing inflation – neither of which includes nominal GDP) and act to curtail Fed independence. With the Fed already under attack for its unconventional policies, this is no doubt a risk Fed officials are well aware. Additional risks include measurement errors for not only current nominal GDP, but potential GDP. Both have been subject to substantial revisions in the past. (Who really knows what potential GDP is?)

In other words, it is probably reasonable to expect the Fed to maintain very easy policy for a very long time, but the public adoption of an NGDP target does not seem likely. In the event of additional economic stress, an increase in the size of Fed purchases seems more probable. Though the risk of a market disruption would be high, the impact would be gradual, and the Fed may well decide that it is worth the risk. It should be noted that in Japan, the BoJ is not able to get sufficient interest in some of its QE operations. At its last meeting, it had to do away with the 0.1% yield floor for its bids!

Separately, the end of both the month and week tomorrow suggests there will likely to be some good risk asset buying from the real money community through the end of the week.

Notable:

  • US Durable Goods orders dropped a shocking -13.2% off of a drop in aircraft orders, but Capital Goods Orders, Nondefense, Ex Air, improved to 1.1% vs 0.7% exp and -3.4% prev
  • US Jobless Claims dropped to 3359k last week vs 375k exp and 382k prev. This is the lowest print since July.

Upcoming Data:

  • Fri: US Personal Income, Spending, PCE Deflator, Chicago PMI, China HSBC Mfg PMI
  • Mon: ChinaMfg PMI, ItalyMfg PMI, UKMfg PMI, US ISM, Australia Mfg PMI
  • Tues: RBA, China Non-Mfg PMI
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