Bernanke’s Fed further endorsed transparency with the decision to publish their target FF’s rate - how long they plan to keep short-term rates at current levels. The first will be announced after the Jan 24/25 meeting.
Greenspan’s paranoia of transparency came from his terror that the decision-making process would be found out; that is, that policy makers would be found to be simply human, not the anointed after all.
At least Bernanke has moved to make the stealth operation less stealth. But with this new policy there are two problems for the Fed, and, two seeds of opportunity for clients.
First, the Fed is mediocre at best at forecasting. Next, this bunch are even worse at judging how a change in short rates may impact the curve. We will be able to identify 1) economic reality just ahead better than they, and 2) we will be better able to judge the impact of any projected FF’s target on the term structure. And of course Bernanke will expect to use this new policy as a tool to impact just that - the term structure.
In Greenspan’s time there were occasions when he grew downright despondent because the movement in long term yields was just the reverse of his policy intent. Timidity, a modest lift in FF’s simply provided an irritant in an environment of price pressure - if you strike a king you had better kill him. Long rates went higher when he thought they should have gone lower. Too much.
Judging change in the term structure is not linked to a rule, model or formula; it is too elusive, too fluid for that. We’ve done rather well past years (although our last US example, set Oct/11, was hindered by mass world flight to sanctuary) and expect further opportunities to be birthed by this policy change.
Robert Craven
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