By Steven K. Beckner
(MNI) – There is undeniably an openness to further easing at some
point among the Federal Reserve leadership and most members of the Board
of Governors.
Among this year’s other FOMC voters, only Richmond Federal Reserve
Bank President Jeffrey Lacker has expressed clear opposition. Last
Friday he said he does not “see a compelling case for further stimulus.
The record over the last year and a half is that stimulus raised
inflation and didn’t do much for growth on a sustained basis. I think if
we did it again, that’s what would happen.”
Others are more ambivalent. Atlanta Federal Reserve Bank President
Dennis Lockhart said Jan. 9 that he continues to “harbor some skepticism
whether a new round of quantitative easing would be highly effective.”
But he added, “I am not foreclosing that as an option.”
“The economy has made progress, but it remains far from full
health,” Lockhart said, adding that “steady even if unspectacular growth
accompanied by inflation in the neighborhood of 2% justifies some
reluctance to change, in either direction, the FOMC’s accommodative
policy. At the same time, I think slow progress toward full employment
justifies continuing consideration of whether more can and should be
done.”
“So for me as a policymaker, now is not a time to lock into a rigid
position,” Lockhart said.
Cleveland Federal Reserve Bank President Sandra Pianalto sounded
equally ambiguous Jan. 10.
“Despite our current accommodative monetary policy, the recovery
from the recent financial and economic crisis has been frustratingly
slow,” she said. “While it is true that the federal funds rate has been
near zero for some time, some economic policy models indicate that
monetary policy should be even more accommodative than it is today. And
this is true even after accounting for the large scale asset programs
the FOMC has initiated to compensate for the fact that the federal funds
rate cannot go below zero.”
Pianalto said she “will continue to weigh the costs and benefits of
further policy actions.”
But Pianalto has supported past easing initiatives, and she
suggested she would do so again when she commented, “we are close to
price stability, which I define as an inflation rate of 2% over the
medium term. But the economy remains far away from full employment.
According to my outlook, an unemployment rate of 6% will take longer to
reach, perhaps even four or five years.”
On the other end of the spectrum from Lacker, San Francisco Federal
Reserve Bank President John Williams gave strong hints that he would
favor more easing Jan. 10.
“My forecast is that inflation will dip down to below 1.5% this
year … and stay around there next year. I expect unemployment to come
down very gradually and still remain well above full employment for
several years,” Williams told reporters. “If that’s realized, that makes
a case for adding stimulus.”
None of this means next week’s meeting and following press
conference won’t be eventful. The inaugural funds rate forecast ensures
plenty of excitement.
Minutes of the Dec. 13 FOMC meeting revealed plans to incorporate
forecasts of the federal funds rate in the SEP, starting with the Jan.
24-25 meeting — something MNI anticipated it might do in early
December.
The minutes announced that “the SEP will include information about
participants’ projections of the appropriate level of the target federal
funds rate in the fourth quarter of the current year and the next few
calendar years, and over the longer run.” And “the SEP also will report
participants’ current projections of the likely timing of the first
increase in the target rate given their projections of future economic
conditions.”
Since 2007, the FOMC has been publishing its members’ quarterly
projections of GDP growth, unemployment, overall PCE inflation and core
PCE inflation three years out, as well as “longer run” projections for
GDP, unemployment and overall inflation. Those projections, which are
made by all Fed governors and presidents, have always been based on the
assumption of “appropriate monetary policy.”
Now, each participant will make explicit what he or she thinks is
an “appropriate” level of the funds rate over the next three years given
his or her economic forecast. And the SEP will disclose when officials
think the funds rate should be raised from the zero to 25 basis point
range.
The FOMC will not be providing a common funds rate forecast. Nor is
it likely even to provide a “central tendency” forecast of the funds
rate, taking out the highest and lowest few forecasts, as it has done
with the economic indicators. But it probably will provide a range of
forecasts, indeed the full distribution of projections, from which Fed
watchers can make their own calculations of the consensus.
The thing to look for is whether these forecasts confirm or
conflict with the “forward guidance” the FOMC has been providing since
last August — namely that “economic conditions … are likely to
warrant exceptionally low levels for the federal funds rate at least
through mid-2013.”
And, if there is a conflict, the forward guidance will be changed
— or even deleted entirely?
The Dec. 13 minutes reveal that “several members noted that the
reference to mid-2013 might need to be adjusted before long,” and add
that “a number of members noted their dissatisfaction with the
Committee’s current approach for communicating its views regarding the
appropriate path for monetary policy, and looked forward to considering
possible enhancements to the Committee’s communications.”
So it is quite possible that the fed fund forecasts will yield a
different time frame for raising the funds rate than “mid-2013.” That
would virtually force the FOMC to alter or abandon the forward guidance
passage of the policy statement.
Some will undoubtedly advocate the latter. Philadelphia Federal
Reserve Bank President Charles Plosser, one of the members of an FOMC
communications subcommittee headed by Vice Chair Janet Yellen, said last
week that substituting the SEP funds rate forecast for the forward
guidance paragraph would be “a better way of communicating forward
guidance … about the path of policy.”
“I could certainly see that we would abandon the calendar date” and
“substitute the SEP,” he said. “It would be a better way to convey
information.”
Of course, Bernanke will be able to elaborate at length on what it
all means.
Bernanke has often talked about Fed communications as one potential
easing tool. But that is not how others see it.
“It’s about transparency, not about manipulating people’s
expectations,” Plosser said. “It’s not a tool to ease policy.”
Perforce, Bernanke will want to explain the significance and the
purpose of the funds rate projections, lest they be misinterpreted.
MNI understands that the funds rate forecast is just that — a
forecast or, at most, an intention — not a commitment. And, like all
forecasts, they will be subject to change as new economic information
comes in.
If Bernanke and the FOMC are not clear, they could be interpreted
otherwise, leading to consternation as incoming data cause the economic
and monetary projections to be revised.
The new SEP is intended to enhance communication, but ironically
could complicate communication to the extent that some market
participants see the funds rate forecasts as more of a commitment to
keep the funds rate at a certain level until the imputed consensus date
for raising it.
The Dec. 13 minutes also said “an accompanying narrative will
describe the key factors underlying those assessments as well as
qualitative information regarding participants’ expectations for the
Federal Reserve’s balance sheet.”
But the FOMC is unlikely to reveal very much about the size or
composition of the balance sheet.
Beyond that, the Bernanke asked the Yellen subcommittee to explore
“further enhancements to the SEP.” One strong possibility is some sort
of statement of the FOMC’s “longer-run goals and policy strategy.”
The minutes say “participants generally agreed that issuing such a
statement could be helpful in enhancing the transparency and
accountability of monetary policy and in facilitating well-informed
decisionmaking by households and businesses, and thus in enhancing the
Committee’s ability to promote the goals specified in its statutory
mandate in the face of significant economic disturbances.”
There is likely to be a lively debate about those “further
enhancements.”
** Market News International Washington Bureau: 202-371-2121 **
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