Bernanke Tightens Hold on Fed Message Against Hawks
Ben S. Bernanke is tightening his control of Federal Reserve communications to ensure investors hear his pro-stimulus message over the cacophony of more hawkish views from regional bank presidents.
The Fed chairman, starting tomorrow, will cut the time between the release of post-meeting statements by the Federal Open Market Committee and his news briefings, giving investors less opportunity to misperceive the Fed’s intent. In recent presentations, he has pledged to sustain easing, defending $85 billion in monthly bond purchases during congressional testimony last month and warning that “premature removal of accommodation” may weaken the expansion.
“Bernanke rightly views it as imperative to get out in front of any movement to quickly pull away from stimulus, and to signal that to markets,” said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore who worked at the Fed’s division of monetary affairs from 2004 until 2008. Bernanke “felt he needed to take the wheel” of communications to dispel any misperception that the Fed will end bond purchases too soon.
Bernanke’s push to continue record stimulus faltered with the Jan. 3 release of minutes from the FOMC’s December meeting, which said several officials favored slowing or stopping bond buying well before the end of 2013. The yield on the 10-year Treasury note rose that day about 0.07 percentage point to 1.91 percent, the highest since May.
In his congressional testimony Feb. 26 and 27 and a March 1 speech at the Federal Reserve Bank of San Francisco, Bernanke promoted the Fed’s bond purchases, saying stimulus shouldn’t be slowed by financial-stability concerns. Vice Chairman Janet Yellen echoed those views March 4.
The Fed chairman wants to avert an unintended rise in Treasury yields that would undermine his unprecedented efforts to reduce long-term interest rates and speed growth, including the rebound in vehicle sales and housing, said Nathan Sheets, the Fed’s top international economist from 2007 until 2011.
“If long rates rise because of a misunderstanding of the Fed policy path, that is something that is worrisome and that is something they want to clarify,” said Sheets, now global head of international economics at Citigroup Inc. in New York. “Lower rates are absolutely supporting the recovery and stimulating the housing market, autos and durable goods.”
Several FOMC participants have strayed from Bernanke’s line during the past year. Richard Fisher, president of the Federal Reserve Bank of Dallas, said he saw no need for more stimulus on Aug. 8, about a month before the central bank started a third round of quantitative easing.
“We keep applying what I call monetary Ritalin to the system,” he said in an interview on “Bloomberg Surveillance” with Tom Keene and Sara Eisen. “We all know there’s a risk of over-prescribing.”
Philadelphia Fed President Charles Plosser said on Aug. 30 that the potential disadvantages of additional securities purchases outweighed the benefits.
Plosser, Fisher and Richmond Fed President Jeffrey Lacker are the most “hawkish” FOMC participants, calling for a comparatively aggressive approach to fighting inflation, and aren’t “signals” for future committee action, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.
“The committee is increasingly a democracy, and if you have one-fourth of the votes, you’re not going to steer policy,” said Feroli, a former Fed researcher.
The 12 district bank presidents have five votes on the 12- member FOMC, with the New York Fed president holding a permanent position and the others annually rotating onto the panel. Lacker voted in 2012 and repeatedly dissented; neither he, Plosser nor Fisher vote this year.
Bernanke, in speeches and testimonies last year, pushed down yields on 10-year Treasuries by 0.06 percentage point on a cumulative basis, more than any of the other 18 FOMC participants, as he promoted accommodation more forcefully than investors anticipated, according to Macroeconomic Advisers LLC.
The research company gauged the impact from speeches and radio or TV interviews, starting from 15 minutes before the event until two hours afterward. It separately measured the effect from Bernanke’s press conferences and semi-annual testimonies to Congress.
The Fed chairman’s speeches last year, while temporarily reducing bond yields, weren’t enough to counteract speeches by his policy-making colleagues, who boosted 10-year yields by 0.11 percentage point when their enthusiasm for stimulus fell short of investor expectations, according to the St. Louis-based company.
“Last year’s speeches tended to be interpreted as more hawkish than expected,” Macroeconomic Advisers said in a March 8 report.
St. Louis Fed President James Bullard in 14 speeches last year buoyed yields by 0.07 percentage point, the most of any FOMC participant, the research firm said. Bullard was the first Fed official in 2010 to call for a second round of asset purchases, which ran from November 2010 until June 2011.
Bullard, who votes this year, has said the central bank should reduce the pace of bond buying if unemployment declines or economic growth accelerates, a view shared by Fisher and Plosser. The jobless rate fell to 7.7 percent in February from 7.9 percent the previous month, and gross domestic product grew 0.1 percent in the fourth quarter after a 3.1 percent rise in the third.
Investors may give too much weight to the presidents’ doubts about bond buying while underestimating Bernanke’s clout on the FOMC, said Antulio Bomfim, a senior managing director at Macroeconomic Advisers and a former Fed economist.
The seven Fed governors tend to endorse the committee’s statement as a block, Bomfim said. A Fed governor hasn’t dissented since 2005, when Mark Olson dissented from a decision to increase the benchmark interest rate after Hurricane Katrina struck the Gulf Coast.
Also, New York Fed President William C. Dudley would need to cross a “very high bar” to cast a dissenting vote because of his position as FOMC vice chairman, Bomfim said.
Still, Bernanke needs to ensure other policy makers don’t drown out his message, said Timothy Duy, a professor at the University of Oregon.
“At this point in the policy cycle, their most effective tool is their communication,” said Duy, an economist at the U.S. Treasury Department’s international-affairs division in 1998-1999. “That means they’ve got to be a lot more effective” at demonstrating their commitment to “ongoing additional easing.”
The Fed has increasingly relied on communications to guide policy after pushing down the target for the federal funds rate to near zero in December 2008 and deploying unprecedented stimulus tools, including the bond purchases.
Bernanke created a communications committee led by Yellen to shed light on decision-making and minimize public confusion over the Fed’s goals. Central bank officials say greater transparency makes their actions more potent, citing how public expectations about future policy influence the economy.
The Fed in January 2012 took one of its biggest steps ever toward greater openness by publishing a mission statement, an inflation target and anonymous forecasts by each FOMC participant for the rate on overnight loans between banks.
Bernanke plans to address the media tomorrow in Washington at 2:30 p.m., 30 minutes after release of the FOMC statement, the Fed said last week in a statement. Since his first media briefing in April 2011, the gap between the statement and his comments had been 1 hour, 45 minutes.
The Fed also will release the fed-funds forecasts, along with other projections, at the same time as the statement. Previously there was a 90-minute delay.
“I don’t remember if there have been major misunderstandings of the statement -- I don’t think so -- but in the process of exiting from QE, such misunderstandings are possible,” Sheets said. “This reduces such risks. It strikes me as a sensible move.”
Since the Fed announced a third round of bond purchases on Sept. 13, the 10-year Treasury yield has risen to 1.89 percent at 1:40 p.m. from 1.72 percent, according to Bloomberg Bond Trader prices. It hit an 11-month high on March 8 after the Labor Department said employers added 236,000 workers in February, more than economists projected, and the jobless rate fell.
Fed purchases of Treasuries and mortgage-backed securities are holding rates about 0.2 percentage point lower than they’d otherwise be, Sheets said. Reduced borrowing costs are stoking housing construction and bolstering home prices, providing “a very important recovery impulse for the economy.”
Bernanke has made it clear he’s committed to pressing on with record stimulus as he nears the end of his second term next January, said Julia Coronado, chief economist for North America at BNP Paribas in New York and a former Fed economist.
“We’ll have made more progress on the employment front, but we’re still going to be a ways away from the Fed’s goals,” she said. At the end of 2013 “it’s still going to be very much a work in progress.”
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