–Greece A Potential Game Changer?
By Brai Odion-Esene
WASHINGTON (MNI) – There is no clear consensus among Fed watchers
about what action the central bank’s policymaking body will, or will not
take, when it meets in Washington next week, but the majority is leaning
towards FOMC members maintaining the status quo while they continue to
assess the health of the economy.
The Federal Open Market Committee meets June 19-20, and Standard &
Poor’s Deputy Chief Economist Beth Ann Bovino told MNI she expects the
Federal Reserve to remain on the sidelines following the meeting.
She argued that recent comments by Fed officials, including
Chairman Ben Bernanke, appear to have indicated they are moving away
from considering any kind of additional quantitative easing —
especially with deflation not a main concern.
She added, however, “that while I expect the Fed to remain on the
sidelines at the next FOMC meeting, the Greek election on June 17 could
be a game changer, forcing the Fed’s hand to move sooner than we
thought.”
According to FTN Financial’s Jim Vogel, however, “even if the
markets are convinced of a particular outcome in Greece based on the
elections, I don’t think central banks will necessarily follow that
quickly.”
Vogel said he is giving it a 70% chance that the FOMC does not
announce any major new programs.
“They may open the door for some with a slight change in language
but that’s not our expected case,” he told MNI.
Pierpont Securities Chief Economist Stephen Stanley also expects
the Fed to stand pat following the June meeting.
“I don’t think we are going to get a major new initiative, either a
new round of QE, or a full-blown six-month extension of Twist,” he said.
‘Operation Twist’ refers to the Fed’s $400 billion maturity
extension program, in which it sells shorter-dated Treasury securities
from its portfolio and buys and equal amount of long term government
bonds. It is set to expire on June 30.
With rates already extremely low, “it’s just not clear that there’s
a strong case for doing more along those same lines,” Stanley added.
“The reason I’m a bit skeptical in terms of major action is I think
a lot of the folks on the committee have started to come to the
realization that the types of things that they’ve been doing … are not
really having much of an impact on the economy,” Stanley said.
Bovino noted there had been a shift among FOMC participants — in
terms of their individual forecasts — towards hiking interest rates
earlier than the late-2014 calendar date, but now, “I think that’s going
to be pushed out.”
The FOMC statement will likely retain the late 2014 calendar date,
she said, but members could, through the separate release showing their
expectations for the future path of the federal funds rate, “get a
little bit more comfortable in extending that deadline out towards, at
least, through late-2014 and even later.”
“I think the members are going to be a little bit more on the
easing mode,” Bovino said.
Vogel said there might be shifts in participants’ fed funds rate
forecasts, but, “the die-hards won’t die at this meeting.”
Still, those Fed officials who had been in the middle, and were
impressed by some of the apparent strength in the first quarter as
recently as the April meeting, “may move back a little bit,” he added.
“I think there’s a chance they’ll do something,” HSBC’s Chief U.S.
Economist Kevin Logan told MNI, noting some members of the FOMC have
indicated that they think it would be appropriate to provide the economy
with more monetary accommodation.
Logan noted that recent data, particularly on the employment front,
has been disappointing and sustaining progress towards improvement in
the labor market remains a priority for the Fed.
“The latest data on employment suggests that we are not getting the
results they anticipated,” he said.
The Fed is in “a tough spot,” Logan said, as it is not completely
clear if the labor market is slowing down, or just in pause mode and
will pick up again soon.
“Do they wait, see if the data clears up, and meanwhile the economy
falls into recession? Not a good choice,” Logan said. “Or they wait, the
economy picks up and everything is fine.”
So even though the data is ambiguous, and perhaps there is an
argument for waiting, “there is also an argument for acting now,” Logan
opined.
As a result, the HSBC economist said he believes there is a better
than 50-50 chance — “not much better, but better” — that the Fed will
take some action.
The Fed will release FOMC participants’ economic forecasts and
interest rate projections after the meeting, but Pierpont’s Stanley said
the short time period between this and the last time members gave their
projections (after the April 24-25 meeting) means “I don’t know how
meaningful that will be.”
“I suspect they’ll probably revise down the near-term growth
outlook a little bit,” he said.
As for their interest rate projections, Stanley reiterated that the
short time between the April and June meetings means he would be
surprised if there were any “substantive” changes.
FTN Financial’s Vogel said it is possible a voter on the FOMC
dissents against the decision because they want more stimulus, and that
the regional Fed presidents “will come closer to the staff forecasts for
the economy,” but the staff forecasts will not change that much.
“We think there’ll be more homogeneity among the forecasts,” he
said.
The Fed has a menu of options should they decide to act, Logan
said: from tweaking the wording of the FOMC statement to hint at future
action, extending Operation Twist, using their mortgage portfolio to
extend duration, or expanding the balance sheet.
An appealing option, as opposed to expanding the balance sheet,
“would be extending the duration of the mortgage assets that they have,”
Logan said. “But I have no hint that’s what they are intending to do.”
If the Fed was determined to do something, they could maintain
Operation Twist for another few months and argue that they are just
maintaining the status quo, Stanley said.
“But, my feeling is that they are probably going to want to sit
tight and see how things play out over the next few months,” Stanley
said.
If anything, the surprise would be if they extended Operation
Twist, S&P’s Bovino said, “but I don’t necessarily think that will
happen.”
** MNI Washington Bureau: 202-371-2121 **
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