The Fed (Excerpt)

The Fed has contributed greatly to the bull market with its NZIRP and QE ultra-easy monetary policies, as evidenced by the close correlation of the S&P 500 and the securities holdings of the Fed. Bond yields fell to historic lows as the Fed purchased more fixed-income securities, increasing the attractiveness of stocks.

However, the recent torrent of speeches by members of the "Federal Open Mouth Committee" may be confusing investors. The talking Fed heads all have put their own personal spins on what the central bank is doing and where it is going. Fed officials have said that their goal is to communicate better with the markets. However, their noise-to-signal ratio seems to be getting worse.

On Valentine’s Day (2/14), FRB St. Louis President James Bullard spoke about phasing out QE: “This suggests that as labor markets improve somewhat, the pace of asset purchases could be reduced somewhat, but not ended altogether,” he explained. “This type of policy would send important signals to the private sector concerning the Committee’s judgment on the amount of progress made to that point.”

The next day, in a 2/15 speech, FRB Cleveland President Sandra Pianalto listed four risks to the Fed’s current course and then more or less agreed with Bullard: “[W]e could aim for a smaller sized balance sheet than would otherwise occur if we were to maintain the current pace of asset purchases through the end of this year, as some financial market participants are expecting. This course of action would be all the more attractive if the economic outlook continues to improve, as I expect it will.”

Both these speeches followed a 2/11 speech by Fed Vice Chair Janet Yellen, in which she said that ultra-easy monetary policy might remain in place even if the Fed’s unemployment “threshold” of 6.5% is achieved as long as inflation remains around 2%.

Today's Morning Briefing: Innovation & Its Malcontent. (1) Professor Gordon and Reverend Malthus. (2) The worst forecast on record. (3) No more productivity-enhancing innovations? (4) Dismal scientists vs. street-smart contrarians. (5) Does the Energy Revolution matter? (6) US net petroleum imports cut in half since 1985! (7) Head in the Cloud. (8) The 10K-B.A. (9) Holding pattern: Stocks set to land or refueling for another climb? (10) Fiscal speed bumps. (11) M&A is in fashion. (12) Talking Fed heads. (More for subscribers.)