FOMC today

As we prepare for Ben's FOMC highlights this afternoon it shall be interesting to see how they (he) plan to maneuver (wordsmith) the exit strategy (unwind without market chaos) for the amazing QE box that they have created for themselves. Let's see what happens as we watch the greatest economic show on Earth reveal itself (cue stage right - send in the clowns).....

Stuff to ponder: 

The Federal Advisory Council, a group of 12 bankers from each Fed district who meet four times per year to advise the Fed, warned in their May 17 meeting of the risks to ending QE. The Minutes from the FAC meetings are not normally distributed but were after the May meeting in response to a FOIA request from Bloomberg. 

The Minutes state, “Uncertainty exists about how markets will reestablish normal valuations when the Fed withdraws from the market. It will likely be difficult to unwind policy accommodation, and the end of monetary easing may be painful for consumers and businesses.” Conversely, the FAC said that QE may not be effective, and “Uncertainty about fiscal and monetary policy is deterring business investment that would spur growth…” They went on to warn that, “The Fed's aggressive purchases of 15-year and 30-year MBS have depressed yields for the 'bread and butter' investment in most bank portfolios; banks seeking additional yield have had to turn to investment options with longer durations, lower liquidity, and/or higher credit risk. … [the results of the asset purchases] may encourage unsophisticated investors to take on undue risk to achieve better returns.”

Chart Of The Day

Nonfarm payroll growth has improved marginally, from 185k per month in the 12 months leading up to QE3 to 190k per month since. The unemployment rate was at 8.1% when the Fed announced QE3 but dropped to 7.8% in the subsequent report. Even those who argue for the efficacy of asset purchases cannot credit that drop to the asset purchases given the timing. Since then, the rate has managed to only drop to 7.6%. Moreover, the unemployment rate was falling by 0.07% each month, on average, in the 12 months leading up to QE3. Since the announcement, the drop in the rate has slowed to 0.06% (including the 0.03% initial drop). There is still a deep hole in the labor market, and it’s a bit of a limb to be on to even argue that there has been marginal improvement – much less “substantial improvement”.     (The Market Today ONLINE)