Bernanke Counters Fed Unity Doubt as Regional Chiefs Echo Views
Federal Reserve Chairman Ben S. Bernanke is leaving little doubt that he has enough support for more unconventional easing as soon as November.
In one week, New York Fed President William Dudley, the Boston Fed’s Eric Rosengren and Chicago’s Charles Evans advocated further Fed action. Bernanke himself said Oct. 4 that restarting large-scale asset purchases would probably spur growth, after saying last week that the central bank has a duty to aid the economy as U.S. unemployment holds near 10 percent.
Their remarks have overshadowed opposition from policy makers such as Philadelphia’s Charles Plosser, helping the Fed bring down borrowing costs as traders incorporate their expectations into the price of securities, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. Two- year Treasury yields this week fell to a record 0.3987 percent.
“The consensus is starting to form around more asset purchases,” Feroli said. “Bernanke doesn’t mind that there’s open public debate, but when the majority does come to a view, he wants the public and the markets to understand what that view is so that the public and the markets can price that in.”
Dudley, vice chairman of the Fed’s policy-setting Open Market Committee and the only regional president with a permanent vote, said Oct. 1 that the outlook for U.S. job growth and inflation is “unacceptable” and that “further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident.”
Dudley’s speech was “a strong signal” that the FOMC will restart asset purchases at its next meeting on Nov. 2-3, Goldman Sachs Group Inc. economist Edward McKelvey said in a report this week.
“As vice chairman of the FOMC, he is one of the three most senior members of the committee,” McKelvey wrote. “He would be highly unlikely to give a speech of this significance without the concurrence of Chairman Bernanke and probably other key members.”
While that doesn’t mean that all the members of the panel are in agreement, “it does strongly suggest that there is sufficient support for additional asset purchases to make it a serious option at the next meeting.”
Michelle Smith, a Fed spokeswoman, declined to comment. The FOMC has 12 members who vote at policy meetings in any given year: seven Washington-based Fed governors, the New York Fed president, and four of the 11 other regional bank presidents. There is one vacancy on the board.
Rate Near Zero
The Fed cut its benchmark interest rate almost to zero at the height of the financial crisis in December 2008 and turned to asset purchases to bring down long-term borrowing costs, eventually buying $1.7 trillion of mortgage-backed securities, agency debt and Treasuries. The purchases ended in March, and the Fed began to lay plans to exit from its unprecedented intervention.
In August, the central bank surprised investors by announcing it would keep its securities holdings unchanged at $2.05 trillion by reinvesting proceeds from mortgage debt into Treasuries, putting the exit on hold.
The Standard & Poor’s 500 Index tumbled 7.1 percent during the two weeks following the statement on concern the recovery would falter.
At its next meeting on Sept. 21, the FOMC said it was prepared to ease policy “if needed” to spur growth and achieve its dual mandate of stable prices and full employment.
‘A Little Worrisome’
“If we assume they’re going to move in November, they’ve certainly prepped the market more fully and completely than they did in August,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “It was a little worrisome that it was so abrupt and suggested maybe something dire was going on.”
Additional securities purchases are “partially priced in already,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York. “The Federal Reserve is feeling the economy is not strong enough and that they need to give it a boost.”
The yield on the 10-year Treasury note traded near a five- week low yesterday, touching 2.43 percent. Jersey predicts it will drop to 2.25 percent by year-end as the Fed buys more securities.
Lowering long-term interest rates by restarting purchases of Treasuries or mortgage debt would have a “significant” effect on the economy by supporting the value of homes and stocks, making housing and refinancing mortgages more affordable and reducing the cost of capital for businesses, Dudley said last week.
Buying about $500 billion of securities, for example, would add as much stimulus as reducing the Fed’s benchmark rate 0.5 percentage point to 0.75 percentage point, depending on how long investors expect the Fed to hold the assets, according to Dudley.
Brian Sack, head of the New York Fed’s markets desk, echoed Dudley’s remarks in an Oct. 4 speech in Newport Beach, California. Expanding the balance sheet would “likely provide additional accommodation” and help stimulate a recovery that’s forecast to be “relatively tepid,” he said.
“The one side that we hear is very bearish,” said Gregory Habeeb, who manages $8.5 billion in fixed-income assets at Calvert Asset Management Co. in Bethesda, Maryland. Bernanke is “the one who commands the most attention, and he’s giving the one side.”
Positive economic reports could still dissuade policy makers from opting to ease further, said Robert Dye, a senior economist at PNC Financial Services Group Inc. in Pittsburgh.
“I would agree that the likelihood of that occurring has increased, but I would stop there and say it is not a certainty yet,” Dye said. He sees a 60 percent chance the Fed will decide to expand the balance sheet in November.
“It’s going to depend on economic conditions, and if we start to get significantly better data they might decide to hold off,” he said.
Habeeb said the Fed may end up hurting the recovery, not helping, by reinforcing a negative view of the economy that damages business and consumer confidence.
Some regional Fed chiefs have spoken out against more action by the central bank.
Dallas Fed President Richard Fisher said Oct. 1 that it’s “not clear that conditions warrant further crisis-like deployment of the Fed’s arsenal.”
The Philadelphia Fed’s Plosser said Sept. 29 that he doesn’t see how additional asset purchases will help employment in the near term, and Narayana Kocherlakota of Minneapolis said it would probably have a “more muted effect” than the purchases that ended in March. None of the three has a vote on the FOMC this year.
That leaves Kansas City’s Thomas Hoenig, who has already dissented six straight times because he “believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.”