By Steven K. Beckner
(MNI) – Federal Reserve policymakers convene their final Federal
Open Market Committee meeting of the year Tuesday amid conflicting
domestic economic signals, external shocks and internal divisions.
The December FOMC meeting is seldom a time for major policy moves,
and the upcoming one is likely to be no exception, although a change in
communication strategy is possible.
Even if the FOMC does nothing, however, a very accommodative
monetary policy — at least by most standards — will remain in place.
Fed Chairman Ben Bernanke and his colleagues are sure to keep the
federal funds rate target in the zero to 25 basis point range, where it
has been for three years now. And the FOMC is likely to reiterate its
expectation that the key overnight interbank rate will stay
“exceptionally low” “at least through mid-2013″ — or less date-specific
words having much the same effect, potentially.
The FOMC will no doubt continue its “maturity extension program,”
better known as “Operation Twist,” under which the Fed will buy $400
billion of Treasury bonds and sell an equal amount of short-term
Treasury securities in an effort to cut already very low long-term
interest rates.
And it will surely continue reinvesting proceeds of maturing agency
and mortgage backed securities into more MBS to hold down mortgage rates
and fight the seemingly intractable housing depression.
The FOMC also seems likely to tilt toward further action of some
sort, as it did on Nov. 2 when it said, “The Committee will continue to
assess the economic outlook in light of incoming information and is
prepared to employ its tools to promote a stronger economic recovery in
a context of price stability.”
“A context of price stability” is a symmetrical phrase, by which
the FOMC means that it would ease if inflation fell too low, not just
refrain from easing if it went too high.
Some, notably Chicago Fed President Charles Evans, think more
monetary stimulus is needed. Indeed, he dissented at the Nov. 2 meeting
because he wanted more then.
But others are waiting to see whether and how much the economy
improves before deciding whether to ease further. And still others would
only back more accommodation if economic growth and employment
deteriorate relative to the FOMC’s downwardly revised November forecast
and if disinflation threatens to become excessive.
There are even those who think the next most likely or appropriate
move is to tighten policy.
Minneapolis Fed President Narayana Kocherlakota, a current FOMC
voter, didn’t rule out further easing if unemployment unexpectedly rises
or inflation falls too much in a chat with reporters at Stanford
University the week before last, but said it is more likely that the
FOMC will need to “reduce accommodation” next year.
He said this would not mean actual rate hikes initially. Rather,
reducing accommodation “should take the form of a shorter length of the
horizon before we start to raise rates … before we initiate exit.”
The Fed leadership troika, on the other hand, have clearly voiced
an easing bias, echoing the last FOMC statement, but have steered a
somewhat ambivalent middle course in recent comments — lest they
prematurely signal more accommodation is imminent.
Bernanke, in his Nov. 2 post-FOMC press conference, said, “We are
prepared to take further action. We’ve already taken quite a bit of
action but we are prepared to do more and we have the tools to do more
if that’s appropriate.” And eight days later he reinforced that message
by calling unemployment “painfully high” and “far short of maximum
employment” and by saying the Fed is “focusing intently on supporting
job creation.”
Inflation is the least of the Fed’s worries, and if anything could
fall short of target, Bernanke suggested in his speech at Fort Bliss.
“Although spikes in oil and food prices, and other transitory factors,
pushed inflation up earlier this year, inflation appears to be
moderating, and we expect, based on the best information that we have
today, that it will remain reasonably close to our objective of 2% or a
bit less for the foreseeable future.”
Bernanke vowed the Fed will “do its part to help restore high rates
of growth and employment in a context of price stability.”
Fed Vice Chairman Janet Yellen said in late November that monetary
policy is “not a panacea” but added “the scope remains to provide
additional accommodation through enhanced guidance on the path of the
federal funds rate or through additional purchases of longer-term
financial assets.”
Yellen cited “serious headwinds” and said “downside risks to global
growth have increased significantly because of rising financial market
pressures, reflecting an intensification of stress in European banking
and sovereign debt markets as well as broader concerns about the
outlook.”
Warning that the global economy is at “a very dangerous moment,”
she said macroeconomic policymakers generally “should use the scope that
we have.”
New York Fed President William Dudley, the FOMC vice chairman,
recently called himself “very unhappy” with the economic outlook and
said the Fed “could do more” to boost the economy through communication
and balance sheet expansion. If the FOMC decides on the latter he said
“much” of it should be MBS purchases.
Warning the economy “will have trouble building momentum” if
households continue to restrain spending, Dudley said “monetary policy
will continue to have an important role” in “sustaining aggregate demand
at a time that the deleveraging process is not yet fully complete and
credit availability remains impaired.” But he was noncommittal, saying
“we’re going to continue to evaluate whether there are other steps we
can take.”
It is very unlikely that the FOMC will opt for a third round of
“quantitative easing,” which is to say large-scale, net new asset
purchases at this meeting.
Much of the recent economic numbers, while not wildly positive,
have been fairly upbeat. Notably the employment data, while open to lots
of interpretation, have been “encouraging,” as Philadelphia Fed
President Charles Plosser said recently. Manufacturing activity has
picked up, and consumer spending has shown moderately good growth.
-more- (1 of 2)
** Market News International **
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