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Friday, June 21, 2013

Is Bernanke pulling a Trichet?

by Calculated Risk on 6/21/2013 02:10:00 PM

Former European Central Bank (ECB) President Jean Claude Trichet has been widely criticized for pushing to raise rates near the end of his term, even though the euro zone was headed for another recession (an obvious blunder).  Clearly Trichet had a bias towards tightening, even though the data suggested otherwise.

Some people are wondering if Fed Chairman Ben Bernanke has one eye on the calendar too ...

From Tim Duy: It's About The Calendar

Key words: "calendar objectives." Bullard clearly felt the mood in the room was something to the effect of "We know the data is soft, but we want out of this program by the middle of next year, so we are going to lay out a program to do just that."

In light of Bullard's dissent, the market's reaction should be perfectly clear. I have seen some twitter chatter to the effect of market participants didn't understand what Federal Reserve Chairman Ben Bernanke was saying, that his message was really dovish, that interest rates would be nailed to the zero bound in 2015, that the policy was data dependent, etc. Market participants obviously didn't have that interpretation.
The Fed changed the game this week. Bernanke made clear the Fed wants out of quantitative easing. While everything is data dependent, the weight has shifted. The objective of ending quantitative now carries as much if not more weight than the data. Market participants need to adjust the prices of risk assets accordingly.

Bottom Line: I think the question is not how good the data needs to be to convince the Fed to taper. The question is how bad it needs to be to convince them not to taper. And I think it needs to be pretty bad.
However Jon Hilsenrath at the WSJ thinks Analysis: Markets Might Be Misreading Fed’s Messages
Despite the Fed’s efforts to signal it wouldn’t apply the brakes any time soon, the market reacted sharply. Investors appear to have been caught off guard by the specific timetable Mr. Bernanke laid out and the central bank’s optimism about the 2014 growth outlook.
My view is the Fed will be data driven - as opposed to calendar driven - and will only taper in December if there is a clear pickup in the economy during the 2nd half.