Just When You Think It Can’t Get Any Worse…
Bob Eisenbeis
July 1, 2013


Since the FOMC’s June 22nd meeting, markets have been in turmoil. Commentators and Fed watchers have been speculating about exactly what Chairman Bernanke was trying to say on behalf of the Committee. When I commented shortly after the meeting, an astute reader pointed out that I had incorrectly reported that Chairman Bernanke had indicated the asset purchase program might begin to be phased out when unemployment reached 7%. In fact, he indicated that by the time the program had ceased, unemployment would be at 7% sometime in the middle of next year. The import of this remark is critical, especially given that the publicly available FOMC central tendency forecast for unemployment by the end 2013 is 7.2-7.3% and by the end of 2014 the central tendency is an optimistic 6.5-6.8%. If the Chairman meant what he said on behalf of the Committee and its forecasts are realized, then the entire phase out of the asset purchase program would be completed by mid-2014. Hence, the inference markets drew was that the FOMC is poised to begin very soon. This possibility is what riled markets.

But not so quickly! It seems that not all FOMC participants see things the way the Chairman reported. We know St. Louis Federal Reserve Bank President James Bullard went on record saying that he thought the discussion of the phase out was “ill-timed.” Because of his concerns about deflation, he would prefer to retain monetary ease for some time, and this includes the asset purchase program. But now other voices have been added to the chorus. President Narayana Kocherlakota of Federal Reserve Bank of Minneapolis stated in in a press interview and in a document on the Bank’s website that he would prefer to consider starting the phase out of the program using 7% unemployment as a trigger not the end point. He attempted to redirect the public’s focus away from the asset purchase program, which he and the Committee apparently view as a relatively small and quantitatively insignificant component of its accommodative policy. While this view of the policy may be the Committee’s perception, it clearly doesn’t reflect the view of market participants.

So what is the Committee’s decision as to when the phase out will begin, and how long will the phase out process last? What is the trigger? Is there even a trigger? Whom should one listen to? Following Bullard’s and Kocherlakota’s statements, numerous FOMC participants have offered their own clarifications, all of which look remarkably coordinated, with a Roseanne Roseannadanna-like message: “Never mind.” Meaning, “We aren’t going to change the Funds rate anytime soon.”

What we have witnessed is a remarkable miscalculation on the part of the FOMC in terms of their communications strategy and forward rate guidance. Their messaging reflects an under-appreciation of what constitutes information meaningful to markets. Telling markets that a policy move depends upon incoming data is neither informative nor is it forward guidance.

What markets want to know are the answers to two questions:1) what incoming data will be used to make decisions and 2) how will policy depend upon those incoming data? For example, does the decision rest on reaching a critical value in the unemployment rate, the participation rate, or some other trigger? If it rests on the unemployment rate, then what does the Committee view as the most likely path for the unemployment rate to hit the critical trigger? Annual forecasts such as those released after the last meeting are largely meaningless, especially since there is an apparent disconnect, at least to this writer, between the projected path for GDP growth on the one hand and estimates for job creation and unemployment on the other. Growth would have to be accelerating greatly by the end of 2013 to come close to hitting the FOMC’s optimistic unemployment forecasts for 2014. Yet there is a dearth of evidence supporting that view.

Markets are like math teachers, they don’t just care about answers. They also want to see the work that led to the answers to ensure that the reasoning makes sense and everything adds up. Ultimately, they need actionable information. Anchoring the Committee’s communications efforts in more detailed forecasts would greatly improve things.

Markets fret for data-driven answers to the kinds of questions that drive investment decisions and their timing, and they will not be satisfied with fuzzy answers, especially fuzzy answers that don’t add up. For instance, how does the Committee expect to respond to changes in an indicator variable like the unemployment rate? Does it expect to cut back Treasury purchases by $5 billion for every 0.1 percentage point improvement in the unemployment rate? Or perhaps the Committee has some other calibration in mind?

If it doesn’t have such a plan in place, then it shouldn’t say “it depends on incoming data.”

Bob Eisenbeis, Vice Chairman & Chief Monetary Economist


Bob Eisenbeis is Cumberland’s Vice Chairman & Chief Monetary Economist. Prior to joining Cumberland Advisors he was the Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. Bob is presently a member of the U.S. Shadow Financial Regulatory Committee and the Financial Economist Roundtable. His bio is found at www.cumber.com. He may be reached at Bob.Eisenbeis-at-cumber-dot-com.

Category: Federal Reserve, Think Tank


11 Responses to “Just When You Think It Can’t Get Any Worse…”

  1. ConscienceofaConservative says:

    So much for Paul Krugman’s thesis that the rates were not low due to Fed buying bonds.

  2. pm2416 says:

    small edit: I think you meant to say Emily Litella (“never mind”). http://www.hulu.com/watch/2364

  3. leopardtrader says:

    FED communicated methodically and clearly. I dont believe those that continue to pretend otherwise. One reason may be that they are being beclouded by the current market positions,

    1. FED long said it would notify the market about its plans regarding QE
    2. Prior to the recent FOMC meeting they released the first signal by including statement as to increase/reduce purchases based on data. That was the first time .
    3. FED believes that employment is on the mend and could see 7% rate sooner than most think.
    4. FED believes current soft inflation is transient. The expect upside move eventually towards target. However they don’t currently think of inflation worries soon.
    5. FED believes as long as inflation worries is not here tightening is off the table.
    6. FED distinguishes between tapering and tightening

    • VennData says:

      ROFL. Original Post is like all other irrational Fed bashing. Demand more detail of one type and decry the FED for giving the “wrong” detail of another type. When QE stops their past output will be pointed out to have insisted the FED will do QE infinity. They will have underperformed the whole cycle, and their wacky understanding of economics will have more contradictory data to laughingly dismiss them they way Krugman has.

  4. Robert M says:


    This is true for math teachers but not for markets. If markets paid attention to the math only we would not have irrational exuberance in either direction in response. Nor do markets apply pressure to market event makers once the markets identify a mojo momentum maker. The mojo here being the FED. There is no pressure whatsoever from the markets for fiscal reform on a macro basis which would have clear and demonstrable effects on the unemployment rate.
    If anything the markets have shown is that they are much like christian churches and its dogma of transformation of the host and wine into the body and blood of christ in response to Fed statements. Markets suddenly realize they are cannibals and vampires simultaneously and are offended at the fact everyone else realizes it.

  5. modesto says:

    I think what Bernanke was trying to say is, I need to land this plane.
    I going to begin my descent, sit back and relax.

  6. Willy2 says:

    The entire “Taper” discussion shows – IMO – that the FED is VERY well aware of the dangers of QE. I.e.: The destruction of the monetary system (=T-bond market). The world is choking in debt and QE only increases the amount of outstanding debt. In other words, the deflationary crash will only be MUCH more devastating when (the) bloated US (T-bond) market(s) implode(s).

    And all that QE didn’t achieve the primary goal of QE: Weaken the currency. The USD has gone higher since mid 2011.

    I really fail to see why investors are so focussed on what the FED does. The FED is only able to influence markets when “Mr. Market” cooperates. When/If “Mr Market” & “Mr Margin” both say “No” then the actions of the FED will turn out to be fruitless.
    E.g. “Mr. Market” determines interest rates (short term & long term). The FED can kick, yell and scream all it wants but then the FED is FORCED to follow.

  7. gordo365 says:

    Whoever thinks right now is the worst it can get has very weak imagination.

  8. denim says:

    Is it not more likely that the “market” perceived a lack of consensus in the Fed? …and decided to take some investment off the table while the taking was good? The debt ceiling fake crisis is looming this fall, after all.

  9. Pantmaker says:

    I haven’t said it in a while but it drives me bat-shit crazy when the Fed and the unemployment rate are discussed in the same room. The fact that this remains a statutory objective of the Fed is beyond ridiculous. The asset purchasing could stop tomorrow (and should)) and rates wouldn’t budge. Equities on the other hand will get smoked as people realize that all of this David “Bernanke” Copperfield market meddling was all just a bunch of expensive, wildly unsuccessful gimmicks and illusions.