By Steven K. Beckner
Similarly, Fed Governor Sarah Bloom Raskin recently said, “Even if
the usual effectiveness of monetary policy is being attenuated (by
various non-monetary impediments) that conclusion should not be taken
as implying that additional monetary accommodation would be unhelpful.
Indeed, the opposite conclusion might well be the case — namely, that
additional policy accommodation is warranted under present
circumstances.”
But the timing and magnitude of further easing is unclear. It’s an
issue that will no doubt be subject to robust debate next week.
Views vary widely on the Committee.
Clearly, the three Fed presidents who dissented in August and
September — Fisher plus Kocherlakota and Charles Plosser of
Philadelphia — are adamantly opposed to more easing, although the
latter two have said they might support it in the unlikely event that
the economy was heading back into recession and deflation was
threatening.
Among the majority, there are those, such as Chicago Fed President
Charles Evans, who have indicated they would be prepared to ease further
soon.
Others have voiced a willingness to back more stimulus if the
economy does not improve. Tarullo, for example, said, “in the absence of
favorable developments in the coming months, there will be a strong case
for additional measures.”
And there are those who would vote for a QE3 if the outlook for the
economy and/or price stability were to deteriorate.
“Price stability,” in the Fed’s lexicon means core PCE inflation
staying in the FOMC’s implicit target range of 1.7 to 2.0%. (That’s the
“longer term” forecast the FOMC made in July.)
If core inflation and, in turn, longer term headline inflation
appear headed below that range, concerns about excessive disinflation
verging on deflation would unquestionably be cited as justification for
QE3, especially if there has been no progress in reducing unemployment.
Although inflation does appear to have peaked and begun to recede,
much as Bernanke and others predicted, officials are only beginning to
murmur about the possibility of too much disinflation.
Leading up to the meeting, the Fed leadership has not been saying
the kinds of things one would expect them to say if they were trying to
signal near-term rate action. Certainly, they have not been sounding as
openly dovish as Tarullo, who said, “there is need, and ample room, for
additional measures to increase aggregate demand in the near to medium
term, particularly in light of the limited upside risks to inflation
over the medium term.”
Tarullo also said the FOMC “should move back up toward the top of
the list of options the large-scale purchase of additional
mortgage-backed securities (MBS).”
By contrast, the Fed leadership troika has been more restrained.
Last Tuesday, in a speech extolling “flexible inflation targeting,”
Chairman Ben Bernanke said the FOMC is “committed to stabilizing
inflation over the medium run while retaining the flexibility to help
offset cyclical fluctuations in economic activity and employment.”
Last Friday, Vice Chairman Janet Yellen said the economy faces
“significant downside risks” and said the FOMC is “prepared to employ
our tools as appropriate to foster a stronger economic recovery in a
context of price stability.”
And Monday, New York Fed President William Dudley said Operation
Twist “will be helpful in supporting growth and jobs.” But he said, “I
do not think that monetary policy is all-powerful. To get the strongest
possible recovery we need reinforcing action in areas such as housing
and fiscal policy.” He didn’t rule out buying mortgage backed securities
in some future quantitative easing program “depending on how the world
evolves.”
The FOMC may not be ready to move again so soon after announcing
three different easing measures in the past few months. Another reason
for the FOMC to proceed cautiously is that it has limited options.
Operation Twist was a one-time affair, limited by the amount of
short-term Treasuries in the Fed’s portfolio. Cutting the interest rate
the Fed pays banks on excess reserves is seen as having only marginal
benefit and potentially high costs in terms of disruptions to the money
market.
For the Fed to have a significant impact on long-term rates, the
FOMC would have to resume unsterilized quantitative easing. But it
doesn’t appear ready to go there just yet.
The other option, which Bernanke and others have mentioned, is
making additional changes to the “forward guidance” — to clarify the
conditions under which the Fed would begin withdrawing monetary
accommodation. This is being actively explored by a task force chaired
by Yellen and including both Evans and Plosser.
Last week, Yellen said, “One potentially promising way to clarify
the dependence of policy on economic conditions would be for the FOMC to
frame the forward guidance in terms of specific numerical thresholds for
unemployment and inflation.”
Yellen endorsed an approach made by Evans, who recently proposed
that the FOMC commit to keeping the funds rate near zero “until either
the unemployment rate goes below 7% or the outlook for inflation over
the medium term goes above 3%.”
“Such an approach could be helpful in facilitating public
understanding of how various possible shifts in the economic outlook
would be likely to affect the anticipated timing of policy firming,” she
said. “For example, if there were a further downward revision of the
economic outlook, investors would recognize that the conditions for
policy firming would not be reached until a later date and hence would
have a more concrete basis for extending the time period during which
they expect the federal funds rate to remain near zero.”
Kocherlakota, who is on the opposite end of the policy spectrum
from Evans, nevertheless said last Friday that the Chicago Fed president
had put forth “a good framework.”
Kocherlakota said the FOMC needs to put forth an “objective
function that weights inflation versus unemployment” and defines “what’s
our goal … what are we trying to do here?” Kocherlakota told us. “When
rates as low as they are an important part of (communication is saying)
how long rates will be at zero … . How long the public expects them to
be low is very important.” But he said “more clarity” is needed on the
parameters for holding rates near zero.
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