By Steven K. Beckner
(MNI) – When Federal Reserve policymakers wearily convene their
final Federal Open Market Committee meeting of the year next Tuesday,
they will have the less-than-pleasant task of assessing the economy and
the impact of their latest effort to stimulate it.
Given the poor reception the Fed’s new round of quantitative easing
has gotten since the FOMC approved it on Nov. 3, the FOMC meeting might
turn into a kind of collective wound-licking session.
The Committee may be too collegial to expect much in the way of
recriminations, but it’s not hard to imagine some good-humored “I told
you so’s” from Q.E. opponents and skeptics.
Not only has “QE2″ been roundly condemned domestically and
internationally, but it has not had the intended impact on financial
markets. What’s more it seems to have intensified political attacks on
the Fed’s independence, something which has to worry Chairman Ben
Bernanke and his colleagues very much.
The $600 billion of scheduled longer term Treasury security
purchases were intended to lower longer term interest rates. But those
rates are up, not down.
Bernanke, in his appearance on CBS’s “60 Minutes” last Sunday
night, suggested that the mere anticipation of QE2 had the desired
effect on bond yields.
But in fact, yields are up not just from Nov. 3 levels but also
from where they were on Aug. 27, when Bernanke began signaling QE2’s
likelihood in Jackson Hole. At this writing, the 10-year Treasury note
yield stood at 3.23% — up from 2.67% on Nov. 3 and from 2.66% on Aug.
27.
Nor does QE2 appear to be working through the exchange rate
channel. The dollar, with the help of the renewed European debt crisis,
is stronger not weaker.
Now, Fed Vice Chairman Janet Yellen and others have asserted that
it was never the purpose of QE2 to weaken the dollar, but minutes of the
Nov. 3 FOMC meeting make clear that was an anticipated result. And St.
Louis Fed President James Bullard openly spoke of that expectation in a
Dec. 2 speech — noting that the dollar had fallen initially and
observing, “Dollar depreciation is a normal by-product of an easier
monetary policy, provided all else is held constant in the rest of the
world.”
About the best that can be said for QE2’s efficacy so far is that
stock prices are up quite a bit since late August, but up only modestly
since Nov. 3.
So the jury is very much out on how well the resumption of
quantitative easing will work. Fed officials hope that, at the very
least, QE2 will keep rates lower than they might otherwise have been.
And there is hope that those lower-than-otherwise rates will at least
lighten the burden of servicing existing debt, if not incentivize
financing of new spending and investment.
But, arguably, the economy’s fate depends much more on what
Congress and the Obama administration do in the area of tax policy,
long-term deficit reduction and a host of other non-monetary policy
areas. Fed officials continue to cite widespread business “uncertainty”
about Washington ukases as a major impediment to economic growth.
There have been some positive economic signs since the FOMC last
met, though they can hardly be attributed to QE2. Officials freely admit
that its impact will operate only with a lag of six to 12 months.
But the data have been only modestly encouraging. The Fed’s beige
book survey conducted for the upcoming meeting found that the economy
“continued to improve” to varying degrees in 10 of 12 Fed districts
through Nov. 19, with the other two reporting a “mixed” performance.
The survey found some improvement in hiring, but found that firms
were still delaying “significant” payroll increases until they see
better sales prospects.
The November employment report proved a big disappointment, with
non-farm payrolls growing a meager 31,000 and the unemployment rate
rising from 9.6% to 9.8%. Even before those dreary data were released,
Bernanke was publicly lamenting high and persistent joblessness.
In his “60 Minutes” interview, conducted before the employment
report was released, Bernanke said, “The unemployment rate is just not
going down.”
“Unemployment is just about the same as it was in mid 2009, when
the economy started growing,” he said. “So, that’s a major concern. And
it looks that at current rates, that it may take some years before the
unemployment rate is back down to more normal levels.”
“Between the peak and the end of last year, we lost eight and a
half million jobs,” Bernanke continued. “We’ve only gotten about a
million of them back so far. And that doesn’t even account (for) the new
people coming into the labor force.”
He added, “at the rate we’re going, it could be four, five years
before we are back to a more normal unemployment rate — somewhere in
the vicinity of say five or six percent.”
Bernanke expressed particular concern about the fact that more than
40% of the unemployed have been unemployed for six months or more.” He
said “it may be a very, very long time before they find themselves back
in a normal working position.”
Bernanke doubted the economy will go back into a “double dip”
recession, but warned that “a very high unemployment rate for a
protracted period of time, which makes consumers, households less
confident, more worried about the future, (is) … the primary source of
risk that we might have another slowdown in the economy.”
Although Bernanke and other QE2 supporters on the FOMC have
declared that they also care about the price stability side of the Fed’s
“dual mandate,” their unmistakable emphasis has been on reducing
unemployment. Bernanke called that “of incredible importance” in a Nov.
30 appearance at Ohio State University.
That worries some FOMC members. Last Monday, Richmond Fed President
Jeffrey Lacker warned against “steering monetary policy off course” by
“targeting unemployment.”
When asked by MNI whether the FOMC majority is putting too much
emphasis on the full employment side of its “dual mandate” at the
expense of its price stability mandate, he replied, “I don’t think
there’s too much emphasis on jobs just yet, but at this point in the
recovery and going forward the next couple of years it’s a risk that we
might get drawn into trying to push unemployment down faster than it’s
really capable of falling.”
When the FOMC announced the $600 billion asset purchase program, it
said it “will regularly review the pace of its securities purchases and
the overall size of the asset-purchase program in light of incoming
information and will adjust the program as needed to best foster maximum
employment and price stability.”
That means that QE2 could be adjusted “in either direction,” as
Bullard told MNI recently.
Bernanke elaborated last Sunday night, saying on CBS that an
increase in the amount of QE2 was “certainly possible.
Elaborating in an unaired segment of the interview, Bernanke said,
“We’re going to be regularly reviewing this. This is not something that
we’ve set into automatic motion going forward. We want to continue to
think about it, whether it needs to be changed, whether it needs to be
increased or decreased or modified
So the FOMC will certainly be reviewing QE2, its impact, its
reception and its prospects.
Aside from adjusting the size of QE2, changes could conceivably be
made to the type and duration of asset purchases at some point. But it
is probably much too soon to expect the FOMC to make any changes in the
program.
Any significant changes are likely to be deferred until the first
FOMC meeting of 2011 on Jan. 25-26, when the FOMC will go through its
quarterly, three-year forecasting exercise again.
At their last meeting, Fed governors and presidents projected that
real GDP growth will accelerate from 2.4-2.5% in 2010 to 3.0-3.6% next
year and anticipated that the unemployment rate will fall to between
8.9% and 9.1%, assuming “appropriate monetary policy.”
If, by the spring, the economy appears to be falling short of those
projections, it would not be surprising if Bernanke pushes for more Q.E.
Changes will not be made lightly — and not without considerable
dissention, especially if inflation and inflation expectations are
heating up despite high unemployment.
** Market News International **
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