Saturday, September 28, 2013

Fed communication

Investors and Fed Talk Past Each Other by James B. Stewart
At least some market professionals read the Fed’s signals right. Michael Hanson and Brian Smedley, analysts at Bank of America Merrill Lynch, presciently warned before the Fed’s meeting that “the markets believe a September taper is a done deal,” but “we anticipate the Fed will attempt to recalibrate market expectations at this meeting. In our view, the best way to do that is by not tapering in September.”

Bill Gross, Pimco’s founder and widely followed bond and interest rate expert, also warned that market expectations had gotten ahead of reality, suggesting the Fed was more likely to “tinker” than “taper.”

Justin Wolfers, a professor of economics at the University of Michigan who is currently at the Brookings Institution in Washington, told me this week that investors shouldn’t have been so surprised. “Bernanke never promised to taper in September,” Professor Wolfers said. “He always said the decision was data-dependent.” It turned out that “the data were worse than when he first started talking about tapering.” And with a fiscal showdown looming in Congress, tightening monetary policy now would have been reckless, he said.

Blinder and Woodford are quoted.

Some bond traders were upset that the Fed didn't taper as they said they might. The analysts above who guessed right recognized that Bernanke said their decision was data-dependent and the data wasn't good. Plus there's the debt ceiling clown show.

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