Can You Understand "Fed Speak"

By FX Empire Analyst - Barry Norman
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Yesterday, the FOMC minutes (the Federal Open Market Committee), the committee of Federal Reserve members that determines the central bank rate and policy were released from their June meeting. A statement was made at the time of the meeting explaining the thoughts and actions of the committee. Two weeks later the official minutes of that meeting are released to the public.

At which time economists, analysts, traders and speculators try to read the minds of the Fed members to determine what their thinking was and to interpret the meaning of the statement and to predict the next move by the Fed. It is more like reading a crystal ball. The Fed members also use their own language known as "Fed Speak"

Below are the highlights of the minutes. I will leave the interpretation to you.

* The more dovish members of the FOMC are strident in their calls for further monetary policy action; the rest of the committee is taking a ‘wait and see’ approach: “A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth… Several others noted that additional policy action could be warranted if the economic recovery were to lose momentum.”

* There is concern within the FOMC that the Fed is coming to own too many securities: “A few members observed that it would be helpful to have a better understanding of how large the Federal Reserve’s asset purchases would have to be to cause a meaningful deterioration in securities market functioning.” 

* The Fed is considering monetary policies that it has not yet employed: “Several participants commented that it would be desirable to explore the possibility of developing new tools to promote more accommodative financial conditions and thereby support a stronger economic recovery.”

* The Fed might move towards issuing a single economic forecast much as the BoC, BoE, and other central banks do: “The Chairman asked the subcommittee on communications to explore the feasibility and workability of potential approaches to developing an FOMC consensus forecast.”

The bottom line is that the minutes imply that the Fed could well undertake further monetary stimulus if the balance of Q2 economic data and early Q3 economic data show ongoing deterioration in the economy. Further deterioration would mean: a) more weak jobs data, b) ongoing disinflation (i.e. inflation falling month-on-month), c) weaker consumption, and d) GDP growth below 2% in Q2.

One economist wrote the follow "Essentially, one’s outlook for Fed policy needs to be premised on one’s outlook for the US economy. We have anticipated subdued US economic growth, a weaker jobs market, and an ebbing in inflation throughout the year (even as markets were quite excited by strong jobs numbers in January and February). As we expect more of the same weak performance from the economy during Q2 and early Q3, we therefore think that QE3 is increasingly likely". 

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