In the 80's and 90's understanding the Fed was all about reading the tea leaves of unknown behavior. The focus of analysts, Fed watchers, was on the lack of Fed transparency. Firms hired former Fed economists to get the inside scoop on what was going on in the FOMC. You did not see minutes and you did not get clear answers on policy. It was all about reading the tea leaves.
With limited transparency, much of the Fed discussion concerned creditability; could the Fed send clear signals through clear policies that showed its intentions. The instruments and the mechanics of the Fed were very simple. The Fed would raise or lower the Fed funds rate through open market operations. (I am eliminating the period of monetary targeting which was more confusing than a true change in rate changing policy mechanics.)
2015 will be a very different year because the mechanics of monetary policy will be more important than ever before. It will be important to know not only what the Fed will do but how policy will do implemented. The microeconomics of policy will be very relevant for banks, dealers, and money funds The rate on excess reserves, the reverse repo rates, the structure of the balance sheet, the lending behavior of the Fed, bank regulations, Fed forecasts, and transparency from policy statements will all play a part. Looking at just the Fed funds will not be enough. Similarly, the Fed cannot just raise the Fed funds rate and assume that the balance sheet will adjusted through separate set of objectives. Investors will have to spend more time learning the arcane dynamics of money.
Policy transparency and forward guidance is still a major area of uncertainty for investors. Clarity is still in short supply, but the added dimension of Fed mechanics uncertainty will test the skills of any rate sensitive investor.
With limited transparency, much of the Fed discussion concerned creditability; could the Fed send clear signals through clear policies that showed its intentions. The instruments and the mechanics of the Fed were very simple. The Fed would raise or lower the Fed funds rate through open market operations. (I am eliminating the period of monetary targeting which was more confusing than a true change in rate changing policy mechanics.)
2015 will be a very different year because the mechanics of monetary policy will be more important than ever before. It will be important to know not only what the Fed will do but how policy will do implemented. The microeconomics of policy will be very relevant for banks, dealers, and money funds The rate on excess reserves, the reverse repo rates, the structure of the balance sheet, the lending behavior of the Fed, bank regulations, Fed forecasts, and transparency from policy statements will all play a part. Looking at just the Fed funds will not be enough. Similarly, the Fed cannot just raise the Fed funds rate and assume that the balance sheet will adjusted through separate set of objectives. Investors will have to spend more time learning the arcane dynamics of money.
Policy transparency and forward guidance is still a major area of uncertainty for investors. Clarity is still in short supply, but the added dimension of Fed mechanics uncertainty will test the skills of any rate sensitive investor.
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