Today begins the much-anticipated two day Fed meeting that could finally see the organization take a (small) step toward sanity. Yes, the cash will rain there's no doubt, but I think it will be a fraction less than recent months. Using the Fed's own parameters for changing accommodation policy one might say it's too soon for even the slightest change in course.
Ben Bernanke understands the Fed must be able to jawbone Main Street into action based on the knowledge that the organization can be counted on to follow up on intentions. It's been too long since the first official hints of tapering not to take some face-saving action now.
On that note, it's easy to distinguish a drizzle from a downpour and the change I expect to hear would be undetectable. The data isn't there and that makes the timing perfect for the Fed. If they lop off $10.0 billion to its current monthly buying binge it sets up future economic reports as a report card for their ability to predict the economy. Each time data comes out a little better than advertised it gives credence to the notion the economy is ready to roll on its own and makes future action more palatable. If the Fed doesn't taper it's actually closer to admitting their policies have failed.
Balance sheet risks are too high to wait for a six and a half percent unemployment rate and other signals supposedly needed for an official green light to reversing Fed policy.
Because your own strength is unequal to the task, do not assume that it is beyond the powers of man; but if anything is within the powers and province of man, believe that it is within your own compass also.Marcus Aurelius
Ben Bernanke has to take a shot on the assumption things get better. That was the message for the Empire State Fed report yesterday - things are going to get better. If things get better it would be counter to what consumers are saying and belie the extra-cautious mood of businesses. Moreover, things would have to get better with less accommodation not more. I happen to think the nation could do better with a Fed, although fiscal policy and the war on success are still anchors on animal spirits that typically are unlocked after recessions.
New State of Mind
Yesterday's report from the New York Fed on manufacturing conditions in the state underscore why the Fed should pick this meeting to announce less asset purchases. The number itself was below consensus but pointed to expansion. Moreover, the survey points to greater optimism in six months.