For those involved in trading the fixed income markets, August is usually one of the more mundane months. Issuance of new corporate debt slows down significantly since many global investment professionals are on vacation, forced two-week leaves, or holidays, which results in liquidity that is much more challenging. But unlike past years, we’re entering into a September time frame that is poised to be anything but boring, thus causing a likely increase in volatility. So just like the coming attractions at your local movie theater, this is what we have to look forward to in the month of September:
Specific events and their release date:
- “The Last Picture Show” (September 6) – On this Friday, the final major piece of the employment puzzle, the August non-farm payrolls, will be released to the market. This will either confirm the prevailing wisdom regarding the underlying strength of the U.S. economy and the likelihood of tapering of the Fed’s quantitative easing program, or it will provide a difficult conflicting perspective only days before the FOMC meeting. Read more
Several Fed presidents, and “Big Ben” Bernanke himself, have been spending the last week or so trying to convince markets that their program of quantitative easing isn’t on the immediate chopping block and that any eventual tapering would be contingent on continued economic improvement. They’ve tried speeches, press conferences…maybe it’s time for a novelty song, sung to soothe markets back toward normality?
“Tiptoe through the Taper”
by ‘Big Ben’ Bernanke
- Sung to the tune of “Tiptoe through the Tulips” by Tiny Tim, accompanied by ukulele
Panic, after the meeting,
After the meeting of the F-O-M-C
Come tiptoe through the taper with me. Read more
Today, the Federal Reserve announced that it will keep its foot on the easy-money pedal until the unemployment rate drops below 6.5% or inflation looks to go above 2.5%. The proposal has been getting some press as of late (you can see my recent post after Fed Vice Chair Yellen brought up the idea in November). This is almost exactly what Chicago Fed president Charles Evans proposed back in 2011. Well, Evans has evidently convinced everyone else at the Fed. Read more
In his high-profile speech to the New York Economic Club yesterday, Fed chairman Ben Bernanke didn’t give any new thoughts on monetary policy. He did reaffirm his view from September – that the Fed will be accommodative not just until the economy recovers, but until it’s clear that the recovery is sustainable.
…we expect – as we indicated in our September statement – that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In other words, we will want to be sure that the recovery is established before we begin to normalize policy.
However, there were some interesting thoughts about the fiscal cliff (a term that Bernanke himself coined) and on where we are headed post-cliff. First, and not surprisingly, Bernanke was really concerned about the fiscal cliff and the elevated risk of a recession if a deal is not reached. Second, though, dear Ben was downright sunny about the U.S. economy in the event that Washington can make a deal on fiscal policy. Read more
Janet Yellen, the vice chairman of the Federal Reserve, is the latest in a string of Fed bigwigs to get behind an idea of using explicit inflation and unemployment targets to inform the market about the Fed’s future plans – forward guidance, in Fed-speak. During a speech to the Haas School of Business at the University of California, Berkley, Yellen endorsed the idea of moving beyond calendar-date approximations as the means of conveying information on the Fed’s future moves. Now, she stopped short of actually naming any sort of numbers, but this seems like a good direction for the Fed to move. Ms. Yellen knows what she’s talking about too; in 2010, Fed chairman Ben Bernanke appointed her the chair of a new FOMC communications subcommittee. Not to mention that if Bernanke decides not to accept a third term at the head of the Fed, Ms. Yellen is widely seen as first in line as his replacement.
Last week’s Fed meeting was fairly innocuous. They kept rates where they were. They kept their QE in place. The language in the press release didn’t change much. Yet the one thing that struck me was the almost unanimous decision. At this meeting, as with the last several meetings, Jeffrey M. Lacker – president of the Richmond Fed, was the lone dissenter on the Fed’s Open Market Committee (FOMC). Now in my opinion, neither unanimous nor hotly partisan decisions are as interesting as an “almost unanimous” decision. I keep wondering, what does that one guy know that the others don’t…or vice versa.
When danger threatened Metropolis, mild-mannered reporter Clark Kent dashed into the nearest phone booth to change into Superman. When the U.S. economy begins to stall, inflation-hating hawk and president of the Minneapolis Fed, Narayana Kocherlakota, runs up to Ironwood, Michigan to transform into a monetary-policy dove.