The FOMC minutes released yesterday provide an vivid glimpse in the uncertainty across policy-makers. The minutes suggest that there is more uncertainty about how to best implement QE3 or even end it. Overall, there is no lock on the bond purchases of $85 billion until unemployment gets down to a certain level. There is no lock on easing policy for the next year. This will create a new level of uncertainty in monetary policy. Whether right or wrong, the market viewed that monetary policy was on a trigger, no end of easing until unemployment got down to 6.5%. That view has ended.
With Pre-FOMC committee minutes the focus was on the monetary exit strategy some time in the distant future. There would be an end to bond purchases next year. There would be exit uncertainty, but that would be a problem for tomorrow and not for today. Now all of the exit and easing uncertainty has been pushed up to the immediate time-frame. There will be a significant focus on exit behavior at the March meeting. Long-term exit uncertainty has been compressed into tactical uncertainty on size and response in the near-term. This should end the low volatility trend of the last six months. There will again be more focus on Fed speeches, forward guidance, Bernanke signalling, and ultimately more risk-on risk-off trading.
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