Stern, Silvia Say Fed Sticking With View of Moderate Recovery

Gary Stern, former president of the Federal Reserve Bank of Minneapolis, and John Silvia, chief economist at Wells Fargo Securities LLC, said the central bank is sticking with the view that a moderate recovery is under way and a recent rise in inflation is temporary. They spoke after Fed officials met in Washington today.

Former Fed economist David Milton Jones; Ward McCarthy, chief financial economist at Jefferies & Co.; and Julia Coronado, chief economist North America at BNP Paribas, also commented on the statement.

Stern on the Fed’s statement:

“The Fed’s view of the world hasn’t changed very much.”

“They continue to emphasize the transitory nature of inflation” and “continue to talk about the economy improving at a moderate pace.”

“I would expect that the summary that I just gave will be where the chairman will put the emphasis as well” in his press conference, scheduled to begin at 2:15 p.m. in Washington. “It’s steady as it goes.”

Stern on the press conference:

“Not only does he want to get it right for the public and communicate effectively to the public, but of course he’ll be watched very carefully by his colleagues both in the Fed and central banks around the world. So there’s a lot of pressure. On the other hand, he’s been in the position now five-plus years and the issues are very, very familiar to him. So I have every confidence this will go well.”

Silvia on policy:

“They will wrap up QE2 and move on hold for some time, without shrinking the balance sheet, to see how the economy reacts to that.”

“They are sticking with the idea that the recovery is proceeding at a moderate pace. I don’t think the economic outlook has changed too much.”

“They are sticking with the point of view that food and energy price increases are transitory and will work their way out of the system. The challenge is inflation is rising and food and energy prices will feed into other parts of the consumer price index, such as transportation services.”

Jones on the Fed’s pledge to keep the benchmark U.S. interest-rate target low for an “extended period”:

“I’m guessing that maybe as early as the June meeting, they’re going to have to give up on that language: making room at some point for an exit strategy.”

“The Fed chairman is very much in charge of this. I would classify him as dovish, being supported by people like Vice Chair Janet Yellen” and New York Fed President William C. Dudley. “It’s clear they still have the initiative, those who argue that the Fed should keep things on a steady on course here and there’s no need to reason to change policy immediately, other than to let QE2 end on schedule.”

Jones on the press conference:

“It’s an important moment.”

“The Fed may have lifted expectations a little bit high for this press conference. It’s going to be very difficult to not only achieve transparency, but clarity is the key: how much insight can we get into what we expect the Fed to do? That’s difficult at this time when there’s so much uncertainty about the outlook for oil prices and the economy.”

McCarthy on the statement:

“There’s not a whole lot different here. There was more of an explicit acknowledgment of the rise in commodity prices, but they still describe it as expecting it to be transitory and inflation expectations are stable. That’s the key thing.”

“When they talk about the balance sheet, they’re making it clear that once the $600 billion” asset-purchase program “has been completed, the size and composition of the balance sheet is going to be the primary tool.”

The Fed is “being pushed and pulled in different directions,” with the rise in commodity prices, and “it looks like the Japan disaster will take something out of growth.”

Coronado on policy:

“We need a couple of years of what they would consider solidly above-trend growth before we’ve really meaningfully eaten away at the slack. That is not say to they can’t take baby steps toward normalizing policy to some extent between now and then. But they are in no hurry. The U.S. economy isn’t anywhere close to overheating.”

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