By Steven K. Beckner

At his June 22 post-FOMC press conference, MNI asked Fed Chairman
Ben Bernanke: “Do you have a trigger of unemployment or inflation at
which you would begin the exit process and if you do would it make sense
to announce it? If not, why not?”

Bernanke’s reply suggested triggers were almost out of the

“It’s impossible to create a statistical trigger because we have
currently 17 independent members of the FOMC, each having his or her
view on the outlook of the efficacy of monetary policy and on the risks
to inflation and unemployment,” he said. “So we don’t have any such

“We have staff producing various scenarios which give an indication
of, given their projections of where the most likely points for
beginning of an exit would be,” Bernanke continued. “But as I said
earlier, when I was asked about my own projections those are tentative,
depending on a lot happening and depending on the forecast evolving as
expected, and certainly it’s subject to change as new information comes

Other Fed officials downplayed the odds of triggers being adopted
around that time as well. But more recently, there appears to have been
a change of heart, as Lockhart’s comments went on to reveal.

“I would say that there’s been, at least on my part, an increased
appreciation of the value of trying to be as clear as possible to the
public and markets to reduce any tendency to misinterpretation of what
the path of policy is likely to be and perhaps some concern, on my part
at least, that a date-specific forward guidance statement is sort of a
depleting accommodative posture as the date approaches.”

“So in my mind you would get more flexibility out of trying to make
it state dependent or describe states,” he continued. “However, I
certainly see that the committee coming to agreement around those
questions would be very challenging.”

Opponents of triggers within the Fed have warned, among other
things, that setting a trigger could expose the Fed to a loss of
credibility if it were to reach a certain data point, say a certain
level of inflation or unemployment, only to decide not to begin the
tightening process.

Lockhart did not see that as a significant problem. “I think that
markets understand, and the public mostly understands, that these
forward guidance statements are always conditional on the state of the
economy and there could be factors that change the overall position of
the economy and the outlook at the time when a change is (made) … in
line with previous statements. So I think that conditionality is pretty
well understood.”

Having indicated he does not foresee QE3 being warranted under his
modest growth scenario, Lockhart said he thinks “the bar is still high”
for another round of large-scale asset purchases financed by the
creation of new reserves.

But he added, “I don’t rule out another round of asset purchases if
conditions worsen.”

“For me, at least in my current thinking, … the decision
criterion would be a marked deterioration in the economy, headed toward
recession, headed probably into a period of disinflation that looks like
it’s leading to deflation,” he went on. “So a pretty severe
deterioration that would obviously impact employment strongly as well.
So that’s the way I’m thinking about using that tool at the moment.”

Lockhart was dubious, at best, about cutting the IOER from the
current 25 basis points.

“I think it’s a cost-benefit calculation at present,” he said. “I
am skeptical that dropping or eliminating the interest on excess
reserves would really amount to an incentive on the banks to lend.”

“In my view banks are very energetically seeking earning assets,
and they’re eager to make loans, but of course loans that meet their
credit standards, which are somewhat higher than they might have been
years ago,” he added.

What’s more, Lockhart said he sees “a risk of money market
disruption” in cutting the IOER. “And I’m not sure that risk is worth
taking. I think there are some unknowns.”

“To use (former Defense Secretary Donald) Rumsfeld’s term, they are
‘known unknowns,'” he continued. “We recognize they are unknowns, but
how exactly the short-term money markets, the funding markets, would be
affected is an unknown. I’m also … personally I’m not moved by the
arguments that refer to the optics of the payment of interest on
reserves as much as I’m concerned about not disrupting markets.”

As for the possibility of charging banks interest to hold excess
reserves at the Fed, the so-called “Swiss” option, Lockhart said, “I
think it makes less sense than perhaps skinnying down the rate a little

Among the other policy options that have been mentioned or
recommended by Fed watchers and former Fed officials, aside from QE3 and
cutting the IOER, are buying non-traditional assets such as corporate
debt, business loans, consumer receivables or even foreign sovereign

Asked about those options collectively, Lockhart replied, “I really
don’t want to get ahead of the committee on this. They are all in theory
options that are available to us.”

Lockhart said the Fed’s new policy of reinvesting MBS principal
payments in MBS does not mean the Fed is turning its back on its stated
objective of returning to a smaller, all-Treasury portfolio.

“I don’t view it as a really major departure,” he said.

“It is for some period of time a reversal of the longer-term intent
to try to normalize the Fed’s balance sheet as all-Treasury balance
sheet,” he acknowledged. “So it’s a minor suspension of a move toward

But he said the shift is “justified as support for the housing
sector. I think it should put pressure on mortgage rates. I think that
should encourage homeowners who have not refinanced and who can justify
refinancing financially to act, which should be good for personal
consumption expenditures.”

“So I think that, under the circumstances, it’s an incremental
augmentation of an accommodative policy stance that makes sense and
should help a really important part of the economy and be important for
helping personal consumption,” he added.

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