Tuesday’s Main Event: Economic Uncertainty Vs. Monetary Visibility

There’s been an acute shortage of macro clarity in recent days–yes, more so than usual–and so the Federal Reserve this afternoon made a bold effort to enhance the focus, albeit on the one front it can control. “The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013,” the central bank announced earlier via its FOMC statement. It’s not QE3, which some analysts advocate, but it’s ambitious in the sense that the central bank is telling us what monetary policy will be for the next two years. That’s the equivalent of a politician telling you how he’ll vote in 2013. You want clarity? You’ve got it, at least as Fed machinations go. Whether it’ll help is another question, but there’s no question that’s it’s audacious.

It’s also divisive. Three of the 10 voting FOMC members voted nay on the new level of clarity. “It’s a dramatic commitment on the funds rate that’s clearly extremely dovish and shows clear bias toward more potential purchases” of assets, says James O’Sullivan, chief economist at MF Global Inc. via Bloomberg. “Even this was very controversial — to have three dissents highlights the real divisions on the Fed right now.”
The rationale here, of course, is that the economy is unacceptably weak and so moving closer to a QE3-type plan without actually touching that rail leaves some political cover. Plausible denial seems to be in vogue at the Fed now that Washington is a town obsessed with chatting up austerity. But just to keep the crowd guessing (and hoping), the FOMC statement hinted at additional tricks up its sleeve that it may roll out in weeks and months ahead:

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

Apparently there are limits to a new push for clarity, even under the Bernanke Fed.
Meantime, the market votes with its money, as always. Roughly two hours after the Fed announcement hit the streets, the yield on the benchmark 10-year Treasury was 2.16%, or 16 basis points under yesterday’s close. Neither rain nor snow nor Fed announcements nor S&P credit downgrades have dimmed the appetite for U.S. government bonds. Inflation expectations remain nipped in the bud, or so Treasury prices advise.