April 27…first FOMC press conference on tap
Looking back at the last FOMC statement from 15 March, the Fed noted generally firmer economic conditions, with weakness in housing, and concern about “a sharp run-up in oil prices”. However, inflation expectations “have remained stable” and the “Committee expects these effects to be transitory….”
The question is whether things have changed much in Bernanke’s mind. After all, even though there have been many Fed speakers recently, it’s Bernanke that will be fielding the questions and setting the tone. My contention is that he will remain dovish, and outline reasons for continuation of accommodation.
In terms of oil, from mid-February to mid-March, oil ran up from around $85-90 to $100-105. In April so far, the first Crude Oil future is averaging around $110. If Bernanke thought the effects were going to be transitory in March, there probably isn’t much reason to change tone now. When considering inflationary expectations, look at attached chart of Ten Yr note yield vs Ten Yr Inflation Index note (TIP…chart below). This spread is up about 15 bps since mid March to around 261, but was as high as 245-250 at the end of 2009. I don’t believe it is high enough to really change Bernanke’s opinion about inflation expectations being contained, especially as core inflation readings remain low. Also, Case-Shiller home prices have declined for the past 7 months. And general economic conditions are probably slightly weakening currently.
The trickier situation will be the future of QE. I think Bernanke will try to leave things open ended as to whether or not there will be expansion of the program. But I believe he will specifically say that coupon payments and maturing issues will be reinvested for the forseeable future. There is such a huge diversity of opinion regarding QE expansion or cessation and the related outcomes, even among well known analysts, that I think Bernanke’s often repeated statement that the Fed has tools and knowledge regarding removal of accommodation rings hollow.
