Reading Cardiff Garcia's preview of next week's Fed meeting, I was struck by this chart from Nomura:
The extensive discussion of options with arguments for and against reminded me of the fog that hangs over this next meeting. We really have no idea what the Fed is going to do or why they are going to do it. Reasonable analysis ranges from nothing to massive quantitative easing.
To be sure, I am certain of some things. For example, that swap lines will be expanded in the event of a severe market disruption. I am stunned that this was actually considered new information yesterday - it seems that actions along these lines is a no-brainer. But absent the all-bets-are-off-financial-collapse story, I am a bit shaken by the uncertainty going into this meeting.
This strikes me as a major communications failure on the part of the Federal Reserve. The problem, I suspect, is that they don't know exactly what they would do if more easing is called for, which is why we see talk of all possible options - doing nothing, extending Operation Twist, communication changes, and additional assets purchases. They can't tell us what they don't know.
I worry that the Federal Reserve has spent much more intellectual effort on procedures to tighten policy, and not enough effort on additional easing policy. Indeed, easing has really been on an ad-hoc basis. Moreover, we don't really know the triggers for additional easing because officials repeatedly refer to the risk/reward trade off, suggesting that they think the rewards are relatively small at this point, which suggests that the bar must be very high. But many policymakers seem to have a hair trigger for additional easing, so which is it? It the bar high or low? Judging by Federal Reserve Chairman Ben Bernanke's past behavior, I tend to think the bar is pretty high. Perhaps this is just my pessimism talking.
It would be very helpful if at the next FOMC meeting policymakers could agree to a specific path for additional easing, if needed, and eliminate the ad-hoc approach. In other words, put as much effort toward explaining how they would move forward as put toward how they would move back.