A Preview of Bernanke’s Speech
July 17, 2012
According to Deutsche Bank’s Global Markets Research by Dominic Konstam and Aleksandar Kocic, Bernanke might discuss possible policy measures surrounding Quantitative Easing and/or Interest On Excess Reserves in tomorrow’s speech.
Bernanke might use the occasion to discuss likelihood of different policy options. QE will be the most interesting and specifically whether he raises the possibility of sterilized QE using repos or term deposits (see new tools below). This would encourage a decent flattening from long end as it would be equivalent to making the current twist program potentially very aggressive. There has been some speculation that the Fed may revisit an IOER cut in the wake of the ECB’s cut in the deposit rate and negative rates in Denmark.
The report suggests that though the Fed might lay out a framework for future course of action it is unlikely that they are going to act soon since FOMC minutes indicated that some members would not take any steps till there was further loss of economic momentum.
In terms of timing more accommodation we are biased to think that the Fed will tread cautiously.
In part this reflects the FOMC outlook whereby the shifts in interest rate projections were concentrated in a few hawks being less hawkish for 2012 but making up for it in 2013 (by hiking more). The increased dovishness of the doves came in the form of lowering Funds expectations for 2014 i.e. an extension of the period accommodation.
The report, however, also indicated that the Fed might not pursue IOER since negative rates in European front ends would likely lower short rates here.
If anything though it also encourages sterilized twist since the short leg will net have a negligible impact on the front end. Flattening the front ends also is consistent with extending the language of no hike through to 2015.
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