How the Fed could ruin your summer holiday

NEW YORK Sun May 26, 2013 9:28am EDT

Federal Reserve Board Chairman Ben Bernanke testifies before the Joint Economic Committee in Washington May 22, 2013. REUTERS/Gary Cameron

Federal Reserve Board Chairman Ben Bernanke testifies before the Joint Economic Committee in Washington May 22, 2013.

Credit: Reuters/Gary Cameron

NEW YORK (Reuters) - Have your summer vacation all booked? Hoping to ignore your phone for a while, feeling safe in your investments and secure in the knowledge that the world's financial authorities aren't planning any surprises just yet?

Think again.

U.S. Federal Reserve Chairman Ben Bernanke made it clear in congressional testimony this week that the central bank could very well entertain a change in policy sooner than many had predicted. That would mean providing less stimulus to the economy by cutting back on its bond buying program.

The result was an unsettling bout of volatility, with Treasury yields jumping while stocks slid, as investors feared the Fed's support might start to recede.

And that means this could be a summer when investors may find the waves are not only on the beach.

While Fed-watchers are hard-pressed to see a turning point at the bank's June policy meeting, there are plenty of other spots this summer when the Fed could start to prepare markets for change.

Besides the June meeting, there is a policy meeting in July and the release of minutes from both those meetings that will follow. There are three Fridays where monthly jobs data will be released, and plenty of inflation readings and other, lesser economic datapoints.

And of course, there are other potential flashpoints. Will an heir to Bernanke emerge? Will the annual monetary policy symposium in Jackson Hole, Wyoming, this August matter without Ben Bernanke?

Here's what to watch for this summer on the Fed front.

FED MEETINGS AND MINUTES

Fed policymakers meet twice more before the September 2 Labor Day holiday this year: June 18-19 and July 30-31. In addition, the minutes of those Federal Open Market Committee meetings will be released three weeks later.

The June meeting is likely "as good a target as any" for a signal from the Fed about their future plans, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, D.C.

The Fed doesn't want to startle investors, because that would be disruptive. Expect plenty of flags, through meeting statements and minutes, before policymakers make any movements.

DATA DELUGE: JOBS VS INFLATION

The Fed's dual mandate means that both jobs and inflation data will be key. Labor data has been more encouraging of late, with the unemployment rate down to 7.5 percent. The Fed has said it wants to see the rate fall to 6.5 percent before it raises interest rates.

The data has been spotty enough that policymakers could want more consistency. Nonfarm payroll growth has averaged about 208,000 monthly over the past six months but has dipped below that level in some months. Chicago Fed President Charles Evans said he would like to see growth of 200,000 each month before cutting back on bond purchases, also referred to as quantitative easing.

Also far from target is inflation. The Personal Consumption Expenditures index, which is the measurement most watched by the Fed, was only at 1 percent in March. The April reading is due on May 31.

"They would be more comfortable with inflation at 2, 2.5 percent," said Wilmer Stith, co-manager of the Wilmington Broad Market Bond Fund in Baltimore.

With inflation hardly threatening, there are few price pressures to argue for ending the flood of easy money, and the data only goes to underscore the relative weakness of the economy, Stith noted.

THE NEXT FED CHAIR?

Bernanke hasn't officially bid adieu to the Fed, but he is clearly eyeballing the door. His second term ends in January, and there has been no official announcement about his future at the Fed.

"I don't think that I'm the only person in the world who can manage the exit (from quantitative easing)," he said earlier this year.

WITH OR WITHOUT BEN: JACKSON HOLE

Bernanke may be opening the way for possible successors by skipping the Jackson Hole gathering later this year due to an unspecified scheduling conflict.

While Fed Vice-Chair Janet Yellen is emerging as the favorite to hold the position next, Bernanke and company have so far been quiet.

The Fed honcho's absence could mean Jackson Hole offers little in the way of news, in which case, head to the beach and read that trashy novel you've been meaning to get through.

But maybe not.

Bernanke's absence on the schedule could open up a spot for an heir-apparent to take the spotlight instead.

If that is Yellen, "perhaps that is going to be the platform for her to gain even more recognition nationally," Stith said.

DEBT CEILING DEBATES - YES, THIS AGAIN

One thing investors and traders may not have to worry about is a debt ceiling crisis in Washington. The government probably won't breach its congressionally authorized borrowing limit until at least Labor Day.

The perfect bookend to summer, in other words.

(Reporting by Luciana Lopez; Editing by Tim Dobbyn)

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Comments (6)
Harry079 wrote:
“That would mean providing less stimulus to the economy by cutting back on its bond buying program.

The result was an unsettling bout of volatility, with Treasury yields jumping while stocks slid, as investors feared the Fed’s support might start to recede.”

The Feds spending of $45 billion a month buying Treasury Bonds and giving another $40 billion a month to Fanny/Freddie is only stimulating Wall Street and Government entities that caused part of the crisis to begin with.

Nobody is talking about the United States credit card being canceled and the Treasury is tapping Federal Pension Funds just to pay the daily bills coming in.

Just in the past few days the Treasury has tapped about $4 billion dollars through a shell game called “Extraordinary Measures” to keep the government running.

Nearly everyone in Washington and Wall Street is under the delusion that the Treasury can play this game until late September when all the pension funds will be empty and Congress will have another CRISIS over raising the debt limit.

May 26, 2013 12:01pm EDT  --  Report as abuse
Crash866 wrote:
I bet it doesn’t change on 2013 or even 2014. The economy is much weaker than anyone really would care to be honest about. Tick Tock…

May 26, 2013 12:03pm EDT  --  Report as abuse
divinargant wrote:
I don’t see pulling back as being part of their game anytime soon. The Fed has created a monster and as far as I see it they will continue to feed it. Understand it’s not about meeting their employment mandate any longer. That is out the window considering the participation rate and they all know it. It’s all about their target for inflation and considerations of the deficit and until another substantial bubble forms in the real economy that will unleash economic activity on the street that will drive wage growth and consumer consumption by demand much higher than what exists now..forget it. The insanity will continue to keep rates low, monetize the debt in the hopes that something will occur to unleash the animal spirits. Now what do you see as the chances anytime soon for that happening?

May 26, 2013 1:36pm EDT  --  Report as abuse
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