Thursday, March 3, 2011

Listen to the FOMC

This week members of the Federal Reserve Open Market Committee (FOMC) were speaking around the country to different groups. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the FOMC is responsible for open market operations. Here is a summary of those who spoke this week and a brief clip from their talk as they begin showing their cards on the question of monetary policy adjustments or changes. Most of these players are not showing their cards now. There is a meeting of the FOMC on March 15 and the next one is April 26-27. My guess today is that there will not be any change to the current easy money behavior (money printing policy) until employment growth is sustained taking it well past June 2011.

From Fed Chairman Bernanke:
"FOMC participants see inflation remaining low; most project that overall inflation will be about 1-1/4 to 1-3/4 percent this year and in the range of 1 to 2 percent next year and in 2013. Private-sector forecasters generally also anticipate subdued inflation over the next few years.3 Measures of medium- and long-term inflation compensation derived from inflation-indexed Treasury bonds appear broadly consistent with these forecasts. Surveys of households suggest that the public's longer-term inflation expectations also remain stable."
"A wide range of market indicators supports the view that the Federal Reserve's recent actions have been effective. For example, since August, when we announced our policy of reinvesting principal payments on agency debt and agency MBS and indicated that we were considering more securities purchases, equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation as measured in the market for inflation-indexed securities has risen to historically more normal levels. Yields on 5- to 10-year nominal Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases.

All of these developments are what one would expect to see when monetary policy becomes more accommodative, whether through conventional or less conventional means. Interestingly, these market responses are almost identical to those that occurred during the earlier episode of policy easing, notably in the months following our March 2009 announcement. In addition, as I already noted, most forecasters see the economic outlook as having improved since our actions in August; downside risks to the recovery have receded, and the risk of deflation has become negligible. Of course, it is too early to make any firm judgment about how much of the recent improvement in the outlook can be attributed to monetary policy, but these developments are consistent with it having had a beneficial effect." 

From Vice-Chair William Dudley of the New York Fed Branch:
"So what does this all imply for monetary policy? First, barring a sustained period of economic growth so strong that the economy's substantial excess slack is quickly exhausted or a noteworthy rise in inflation expectations, the outlook implies that short-term interest rates are likely to remain unusually low for “an extended period.” The economy can be allowed to grow rapidly for quite some time before there is a real risk that shrinking slack will result in a rise in underlying inflation. We will learn more as we go, and, as always, should be prepared to adjust course in a timely manner if incoming information suggests a different strategy would better promote our objectives.
Second, the Federal Reserve needs to continue to communicate effectively about its objectives, the efficacy of the tools it has at its disposal to achieve those objectives, and the willingness to use these tools as necessary. This is important in order to keep inflation expectations well-anchored. If inflation expectations were to become unanchored because Federal Reserve policymakers failed to communicate clearly, this would be a self-inflicted wound that would make our pursuit of the dual mandate of full employment and price stability more difficult."

From Alternate (non-voting) Dennis Lockhart of the Atlanta Fed:
"A few weeks ago I argued that uncertainty has abated somewhat with the improving economy, the resolution of the November elections, the extension of tax cuts, and the apparent containment of the European sovereign debt crisis. I said that before Tunisia and before the fiscal struggle in Congress gathered steam. The restraining influence of uncertainty persists, to some extent.
Role of monetary policy
In my reading of the available information and research, the slow recovery of employment cannot be simply pinned on one or two causes. It's a multifaceted problem. I do not see one big factor that, if successfully addressed by policy, would rapidly bring the down the rate of unemployment. There is a lot we don't know. Forces at work are complex. Measurements are often imprecise."

From Narayana Kocherlakota of the Minneapolis Fed:
"I conclude that the current accommodative stance of monetary policy is appropriate. However, the Federal Open Market Committee will need to remain vigilant to the possibility of changes in the gap between the unemployment rate and u* (natural rate of unemployment)."

About John C. Williams, Alternate, of the San Francisco Fed:
Dr. Williams took office March 1, 2011, as the twelfth president and chief executive officer of the Twelfth District Federal Reserve Bank, at San Francisco. In 2011, he serves as an alternate voting member of the Federal Open Market Committee.