–Inaugural Fed Funds Forecast Not A Commitment
–Forecast Could Displace Mid-2013 Forward Guidance
By Steven K. Beckner
(MNI) – When Federal Reserve policymakers meet next week for the
first time this year, there will be justifiable anticipation of what new
forward guidance they will provide on their expected path for the
federal funds rate, but actual additional monetary easing seems
unlikely.
The Federal Open Market Committee’s Jan. 24-25 meeting will be a
momentous one in terms of Fed communication. It will be the first time
FOMC participants’ federal funds rate forecasts will be included in the
quarterly, three-year Summary of Economic Projections (SEP). The outcome
of that exercise could deviate from the timing of funds rate hikes the
FOMC has given and could force some adjustments in the policy statement.
Beyond communication, the question is what actual policy changes,
if any, are made — or hinted at.
With the economy showing more signs of life and with the
unemployment rate down substantially, it probably would be difficult for
the FOMC to justify additional easing next week. It is more likely Fed
Chairman Ben Bernanke could lean toward future easing in his post-FOMC
press conference.
Since the start of the year, there has been a vocal eruption of
concern about the sad state of the housing market. Not only have
officials been expressing concern, but Bernanke sent a staff-prepared
“white paper” to Capitol Hill that served to ratchet up the perceived
level of Fed fear about housing.
“The ongoing problems in the U.S. housing market continue to impede
the economic recovery,” the Fed chief wrote to the Senate Banking
Committee and the House Financial Services Committee in an accompanying
letter. “Looking forward, continued weakness in the housing market poses
a significant barrier to a more vigorous economic recovery.”
The white paper, which has been sharply criticized by some
legislators and pundits, suggested that a number of new housing policies
merit consideration, including facilitating the conversion of foreclosed
homes into rental units, making it easier to get mortgage credit and
minimizing “unnecessary foreclosures.”
Most controversially, the Fed recommended enhanced responsibilities
for Fannie Mae and Freddie Mac, even though they are in conservatorship
after helping to fuel the housing boom through what the Securities and
Exchange Commission says was unwarranted securitization of subprime and
other dubious mortgages.
The report should not come as a great surprise. MNI had reported
Dec. 8 that Fed policymakers were “increasingly willing to consider
‘out-of-the-box’ housing policy approaches.”
But the Fed furor over housing and its drag on the economy has
fueled speculation the central bank may be on the verge of a third round
of quantitative easing centered on the purchase of mortgage-backed
securities.
Ironically, the most recent housing data have been fairly upbeat.
The National Association of Home Builders housing market index jumped in
January to 25 from 21, its highest level since June 2007.
Most Fed watchers are not looking for QE3 to be announced next
week, but the timing was moved up after officials’ lukewarm reaction to
the Labor Department’s December employment report.
Notably, despite a better than expected 200,000 non-farm payroll
gain and a further drop in the unemployment rate to 8.5%, New York
Federal Reserve Bank President William Dudley seemed unimpressed.
“Because the outlook for unemployment is unacceptably high relative
to our dual mandate and the outlook for inflation is moderate, I believe
it is also appropriate to continue to evaluate whether we could provide
additional accommodation in a manner that produces more benefits than
costs, regardless of whether action in housing is undertaken or not,”
Dudley said. “Monetary policy and housing policy are much more
complements than substitutes.”
While an MBS-oriented QE3 may well come at some point, it is
probably premature to expect that to happen just yet. There are other
ways to interpret the white paper and associated official rhetoric.
Mortgage rates already are at record lows, partly because of past
Fed efforts. On top of QE1 and QE2, since September the Fed has been
reinvesting principal payments from its holdings of agency debt and
agency mortgage-backed securities in agency mortgage-backed securities.
And it has been extending the maturity of its Treasury security holdings
with the $400 billion “Operation Twist” that is due to continue through
the end of June.
To be sure, there are those who are ready to move ahead with more
yield-lowering actions soon, if not right away.
“With inflation expected to remain below 2%, and unemployment and
underemployment so high, I believe it is important for the Federal
Reserve to continue considering ways to promote stronger growth and
hasten what is a painfully long, slow recovery and adjustment time in
the economy,” Boston Fed President Eric Rosengren said Jan. 5, adding
“more can be done to facilitate this process of adjustment — including
tweaks to Government Sponsored Enterprise (GSE) mortgage programs and,
potentially, expanding the purchase of mortgages by the Federal Reserve
to keep mortgage rates low during a time of great difficulty in housing
markets.”
Chicago Fed President Charles Evans, who dissented in favor of
immediate further easing last December and has said he would be willing
to tolerate inflation up to 3% so long as unemployment is above 7%, is
also on the record favoring “substantial” further easing, talking last
week about another $600 billion of quantitative easing.
But neither the white paper nor other expressions of concern about
housing should necessarily be taken as a near-term easing signal.
Indeed, instead of being a harbinger of monetary policy action, the
Fed housing offensive can be seen as something of a defensive effort to
explain to the public — and Congress — that there are limits to what
monetary policy can accomplish.
The Fed message is that monetary policy alone won’t suffice. As
Dudley put it, the country needs “a ‘comprehensive approach’ to
stabilize the national real estate market and lay the foundations for
recovery.”
“Monetary policy and housing policy are much more complements than
substitutes,” he said.
It might prove difficult to justify injecting more monetary
stimulus at the upcoming meeting, given the generally positive tone of
the data. Most recently, the Fed’s industrial production index is up
0.4% in December, with manufacturing output alone up 0.9%. Capacity
utilization is up three-tenths to 78.1% — 1.2% higher than a year ago.
The beige book survey conducted for the upcoming meeting found that
“national economic activity expanded at a modest to moderate pace during
the reporting period of late November through the end of December.”
Nor can the Fed really point to any real threat of excessive
disinflation — particularly after the Labor Department’s report that
the core producer price index jumped 0.3% in December.
-more-
** Market News International Washington Bureau: 202-371-2121 **
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