This will be my final FOMC post-mortem. At least I hope so. I remain as frustrated at the outcome of this meeting as in the run-up to the meeting. Reviewing what I already wrote as well as comments across the web leaves me with this:
- The general argument that supported expectations of QE3 was broadly correct. The basis of this argument was a deterioration in the forecast matched with moderating inflation data and increasing downside risks. A solid argument in light of speeches by Vice Chair Janet Yellen and San Francisco President John WIlliams. And this line of thought was consistent with the Fed's actual projections. The Fed, however, did not follow through on their own projections, which is frustrating. It strikes me as a sloppy communications strategy.
- The Fed wants to see more data before making another move. This seemed to be evident in Bernanke's press conference. I suspected this might be the case, but am surprised that while they are sufficiently uncertain of the data to forestall QE, they were certain enough to mark down their forecasts.
- The labor market remains a critical indicator. It is clear from the final sentence that sustained progress in labor market conditions would prevent additional easing, and vice versa. At least this seems clear - arguably, by this metric the Fed would already embraced QE3. Again, they want more data. The possibility that seasonal adjustment issues are at play in the data weighs heavily on their minds.
- The Fed is very uncertain about the impacts of additional QE. This uncertainty is probably the most significant impediment to additional easing. It is really the only explanation for Bernanke's hesitation to do more now; clearly the forecast justifies additional action as it indicates the Fed does not expect to meet either its employment or inflation mandates.
- The form of additional easing remains uncertain. Like other officials, Bernanke did not close the door on additional asset purchases. I noted earlier, however, that the statement no longer singles out balance sheet operations as the next tool. Arguably, this change was simply necessary to eliminate the "composition" of the balance sheet option, as the Fed's ability to change the composition via twisting will expire at the end of the year. That said, they could still change the composition by shifting between Treasuries and mortgage assets, so the composition tools is not necessarily dead. Or they could be signalling an intention to use communications tools as an alternative to QE; Yellen has suggested this possibility. My baseline scenario is that if additional easing is deemed necessary, asset purchases will be the likely option. Still, I think it is worth being on the look-out for other options.
Bottom Line: It is as if at each meeting Federal Reserve Chairman Ben Bernanke moves half-way again to additional easing, but never seems to get there. It is one of those philosophical problems. Maybe next time he will make it. If the employment data falters. And he believes the data. And he believe that QE will be effective. And if a blessing of unicorns marches down Constitution Avenue.