By Sheila Mullan
NEW YORK (MNI) – Federal Reserve Gov. Elizabeth Duke Tuesday night
indicated she is not ready to take sides in the public debate over
whether to expand quantitative easing yet said that most of the Fed’s
impact is from expectations, not execution, of policy.
In her appearance before New York University’s Money Marketeers,
Duke also said Fed speeches by themselves may not provide that much of a
hint at what’s going to happen.
Duke spoke on a day where several of her Fed colleagues did offer
opinions.
Dallas Federal Reserve Bank President Richard Fisher earlier left
no doubt about his opposition to QE2 while Chicago Fed President
Charles Evans vigorously endorsed it, even going beyond the conventional
definition to say it should include raising the inflation rate
temporarily to make it more likely businesses would invest and hire.
Atlanta Fed President Dennis Lockhart, reiterating his views in a cable
TV interview, said the Fed’s QE securities purchases need to be larger
than $100 billion to have an impact.
Minneapolis Fed President Narayana Kocherlakota more paralleled
Duke in being noncommittal on the issue.
Duke withheld her own opinion of what the Federal Open Market
Committee should decide at the beginning of next month and said “I would
caution you” about reading too much into “any individual speech” by a
Fed policymaker.
FOMC policy directions can “change between meetings,” she
said, and cited the turn toward quantitative easing in the first place.
The “tools and what action” the Fed takes is not determined before the
meetings, she said.
In her earlier prepared remarks, Duke stressed that the
communication about policy is itself a tool and has consequences.
“The actions we take are intended to have specific effects on the
structure of interest rates and the economy,” she said. “Some of the
impact comes from the transactions themselves, but most of the impact
comes from expectations of what we are going to do.”
A shift in those expectations can be as important as a shift in
monetary policy, she said, and “a shift in the expectations for monetary
policy can have a huge impact on financial markets and the economy. And
it is our communications that most directly shape expectations.”
“It is critically important that we use our official
communication to be as clear as we can possibly be about our assessments
of economic conditions, our policy decisions and intentions, our
targets, and our implementation strategies for nonstandard monetary
policy tools,” she said.
Some communications are more important than others, and she seemed
to suggest that all the Fedspeak from anyone other than the Chairman may
not be the most informative.
Chairman Ben Bernanke, she said, “has the best sense of the current
consensus” of FOMC members.
She also suggested that quantitative easing as a concept was
getting in the way of communications. “Using new tools to manage policy
as we have in the last two years does create particular challenges in
communicating our actions, intentions, and reasoning to the
public,” she said.
Although her prepared remarks were bereft of monetary policy
insights or observations about the state of the economy, concentrating
instead on the mechanisms the Fed uses to inform itself and reach
decisions, she did say in answering questions there is “not enough
demand from creditworthy borrowers.” She also added “there is a
reasonably sized group of businesses which don’t qualify for loans”
under current loan standards.
Duke, nominated by President Bush and sworn in as Fed governor in
August of 2008, joined a Fed at a time when it was plunging into
uncharted territory, forced there by the financial crisis. Now, with the
addition of Janet Yellen as Vice Chair and Gov. Susan Bloom Raskin, “I
am proud to say, “Duke said, “that at our next meeting there will be
four women on the Committee,” including Cleveland Fed President Sandra
Pianalto.
In the FOMC meeting, she said, the Bank presidents’ presidents’
“usually include comments about conditions in their districts, while the
contributions of the Board members tend to reflect their individual
backgrounds.”
“Chairman Bernanke concludes the economic go-round with a summary
of what all the other policymakers said about the economy, then makes
his own comments,” she said. “I always marvel at his ability to quickly
and coherently summarize a diverse set of observations into a cohesive
narrative and use it to transition the discussion to appropriate
policy.”
Bernanke, she said, “usually waits until everyone else has stated
their views before he shares his own opinion and suggests a path
forward.” Then, “after a bit more discussion, the Committee votes,
confirms the date of its next scheduled meeting, and then the meeting
adjourns.”
Yet, she said, the FOMC meeting itself is “just the tip of the
iceberg, the culmination of thousands of hours of work and thought
leading to a single policy statement.”
“Even after two years on the Committee, I still leave feeling
impressed by the level of preparation for, and the focus and intensity
at, these meetings,” she said.
Duke said she tried to formulate her own position in the FOMC
meeting by asking three questions, “how is the economy likely to evolve
in the near and medium term” and then given that outlook, what policy
response is appropriate. Finally she asks, “How should we communicate
our actions so that the public can understand them?”
“Given my background in banking and the important role lending
has played in both the crisis and the recovery, I try to provide the
Committee with insight into current lending conditions, including loan
quality and credit availability,” she said. She prepares beginning about
two weeks before each FOMC meeting by meeting with a staff group who
share their own research. And, she said, she contacts a “number of
bankers from banks of different sizes, geographic market coverage and
business models.”
The Board staff distributes its analysis of the economy to FOMC
members about a week before the meeting as well as a range of usually
three options for the FOMC statement. As the meeting draws closer, “the
staff circulates a discussion of economic developments since the last
meeting and a forecast of economic performance, including hundreds of
charts, tables, and graphs.”
“I find it impossible to form a preference for a policy to improve
the path of economic performance without forming some opinion about what
the performance would be absent any policy action,” she said, “so I
suppose you could say that I formulate an implicit economic forecast for
every meeting.”
Four times a year, her forecast becomes explicit, “to be used
along with the forecasts of other participants in the Summary of
Economic Projections that is later published with the minutes for
that meeting.”
The Thursday before the FOMC meeting, “the staff provides a
policy-focused book designed to help with this question. It contains a
number of estimates of the “Equilibrium Real Federal Funds Rate” — the
interest rate that if maintained would return the economy over time to
its so-called potential, the highest level of output that does not lead
to undue inflationary pressures.”
That book “also includes calculations of policy solutions using
policy rules as well as model-based estimates of optimal policy,” she
said. “And it contains an analysis of each of the policy alternatives
that were circulated in draft form on Tuesday.”
There are often memos on special topics, “such as the use of
large-scale asset purchases” and ways the Fed might exit from
“nonstandard programs when the time comes,” she said.
“It’s hard to believe, but it was only 16 years ago that the FOMC
began releasing any information immediately after its meeting,” she
noted. “Instead, market participants would closely watch the actions of
the New York Fed’s trading desk and would then infer when policy changes
were made.”
“Not until the middle of 1995 did the statements directly state the
target for the federal funds rate, she said. Since then, “the Committee
began to see the statement as more integral to its mission and to pay
more attention to the statement wording.”
“Initially, the Committee discussed the statement wording only
after the policy vote was taken. But by March 2001, the full statement
was actually discussed before voting on the policy itself,” she said.
“Then in October 2007, the FOMC formally recognized the value of the
post-meeting statement by changing procedures to reflect that the policy
vote officially encompassed the full statement, not just the policy
action.”
This, she said, “spelled out what was already understood: What was
said about a policy action was almost as important as the action itself
because it helped explain what the Committee was doing and set up
expectations for what it might do down the road.”
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