Six Takeaways from Fed Speak or The Real Troika

A number of Fed officials have spoken in recent days and there are a few takeaways that will likely set the general stage for the next FOMC meeting on April 24-25.

First, while there are more regional presidents than Governors on the Federal Reserve Board, the Board still drives Fed decisions. Here the three most important are Bernanke, Yellen and Dudley.

Second, the debate over another round of asset purchases seems to be getting less play than the debate over guidance, and the real Troika of BYD (Bernanke, Yellen and Dudley) are reading from the same song book. They are maintaining the view of late 2014, while some regional presidents have expressed leanings for an earlier (2013) move.

Third, another round of asset purchases is not off the table and until a tightening becomes a practical scenario, it is to remain an option. The BYD Troika believes that it has been successful and that is sufficient to keep it as a policy tool. Yet the bar to its use is higher than some observers who suspect hints of it at next FOMC meeting. Current conditions are not sufficient. The economy has to falter, not just in absolute terms but most importantly relative to the Fed's outlook. Alternatively, if inflation falls too much, another round of asset purchases would seem more likely.

Fourth, monetary policy is not based on any desire for a particular currency outcome. The Fed is not seeking to debase the dollar. If the dollar falls as a consequence of its policies, the Fed does not seem particularly concerned. Monetary policy is driven by how the Fed interprets its mandate not on a fx objective.

Fifth, Dudley opined that Q1 GDP is likely to come in around 2.25% (at an annualized rate), which is largely in line with the market's expectations. While it would be slower than the 3% in Q4, it would be still be better than the 4 quarter average of 1.6%.

Sixth, Operation Twist is to be completed by the end of the quarter. Some observers think that the Fed will need to do more than or risk a tightening of monetary conditions. However, the BYD Troika has consistently argued that it is the stock of holdings not the flow that is of ultimate significance.