Has the Fed Signaled Their First Hint of Tightening ?

Source

“The most interesting thing about Tuesday’s Fed meeting: What the committee didn’t say.

The Federal Reserve’s monetary policy making committee left policy as it is and said it was remaining in “wait and see” mode. The Fed expressed more optimism than it has in recent post-meeting statements, though there was still the obligatory acknowledgement of risks. What I was looking for, however, was some sign about future policy. In particular, will the Fed renew its operation twist program in some guise? Are there any signs that it is getting ready to implement an exit strategy?

As I discussed here, there have been recent discussions of a sterilized bond program that could replace its earlier stimulus effort, operation twist. But there are no hints in the statement about this. For that reason, unless there is unexpected negative news ahead I don’t think the Fed will continue its attempts to lower long-term interest rates through programs such as operation twist or sterilized bond buying. If the program is not renewed, and it doesn’t look like it will be, that will represent the first step in tightening policy.

I also don’t expect the Fed to give up its commitment to keep interest rates low through late 2014, a commitment it renewed today, especially since, as I noted here, the Fed has other ways to begin tightening before it has to raise interest rates. For example, because the interest rate is at the zero bound the Fed can begin reducing its balance sheet through sales of financial assets and that won’t impact interest rates until the downward pressure that is holding rates at the zero bound is eliminated. I expect it will pursue those policies first.

Thus, for me the big takeaway, and one that is a bit disappointing given my outlook for the recovery — i.e. that the recovery will be slower than tolerable — is that there are no signs at all that the Fed is considering further easing. In fact, even though the Fed is in “wait and see” mode, all signs point in the other direction.

Here’s the release:…”

Read more