Out goes quantitative easing and in comes more forward guidance. This is the message we are being sent along with the signal of the Fed stating that it will raise rates higher than previously expected in 2015. This was bad news for the bond markets which discount future spot rates.
But what is the Fed really telling us? One view is that the economy is doing better than expected and Fed liquidity is not needed. The Fed would only change forward guidance if the economy was doing better. This, however, is not what has been seen in the data during the fourth quarter.
But what is the Fed really telling us? One view is that the economy is doing better than expected and Fed liquidity is not needed. The Fed would only change forward guidance if the economy was doing better. This, however, is not what has been seen in the data during the fourth quarter.
The latest announcements was also more confusing because the previous "forward guidance" was that easing would come to an end once we hit 6.5% unemployment. We are now at 6.7% unemployment but these unemployment numbers do not seem to represent the true slack in the economy. So now that the Fed has gotten close to its previously stated goal it has moved the goalpost or changed the game by saying that they will look at a broader mix of data to tell whether there should be a change in policy. No rules. We now do not know what numbers to focus on other than we need to look at all of them. Can you really call this forward guidance when the central banks says something like, "we are going to look at a lot of things."
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