Bernanke Policy Credibility Seen Outlasting His Fed TermSteve Matthews and Aki Ito
The end of Ben S. Bernanke’s term as Federal Reserve chairman in January 2014 hasn’t stopped investors from betting the central bank will hold the benchmark interest rate close to zero into the following year.
Bond-market measures from overnight index swaps indicate no increase in the federal funds rate until mid-2015, compared with the central bank’s current view that the rate will probably stay low at least through late 2014. The gap between two- and five-year Treasury yields, which shrinks when traders expect benchmark rates to remain subdued, is more than 50 percent narrower than its average since 2008.
Bernanke has come under attack from Republican presidential candidate Mitt Romney, who said he won’t reappoint the Fed chairman and criticized his policies as ineffective and a threat to price stability. That isn’t impairing Bernanke’s use of a forecast for the fed funds rate as a policy tool, said Joseph Gagnon, a former associate director at the Fed Board’s Division of International Finance.
“The markets tend to believe them,” Gagnon, senior fellow at the Peterson Institute for International Economics in Washington, said of Fed officials. Investors “can have a high degree of confidence over the next two to three years” in any Fed pledge because most policy makers will probably remain at the central bank after Bernanke’s term ends.
The Federal Open Market Committee plans to release a statement today at about 12:30 p.m. after a two-day meeting in Washington. At 2 p.m. the Fed will release policy makers’ forecasts for unemployment, inflation and the expected path of the federal funds rate over the next several years. Bernanke plans to hold a press conference at about 2:15 p.m.
The central bank will probably announce a third round of bond purchases, according to almost two-thirds of economists in a Bloomberg survey, while also extending the duration of its zero-interest-rate policy into 2015.
Bernanke, a 58-year-old former Princeton University professor, has stretched the bounds of monetary policy as he battled the financial crisis and the 18-month recession that ended in June 2009 and then tried to keep the expansion going.
The Fed bought $2.3 trillion of securities in two rounds after cutting its benchmark interest rate almost to zero in December 2008. In August 2011, the Fed started to tie the outlook for low rates to a specific date.
President Barack Obama, who reappointed Bernanke in 2010, hasn’t said whether he’ll ask the Fed chairman to stay for a third term. Bernanke hasn’t said whether he wants another term.
Fed officials have discussed how to make their interest-rate guidance more explicit, according to minutes of the July 31-Aug. 1 FOMC meeting. One “particularly effective” approach may be to pledge “a highly accommodative stance” of policy “even as the recovery progressed,” according to the minutes.
“It would be a pretty strong statement,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. and a former Fed economist, who said he expects the central bank to lengthen its interest-rate forecast to 2015.
Bernanke said in an Aug. 31 speech that the FOMC, through its communications on interest rates, aims to ensure longer-term borrowing costs remain low.
Speaking at a Fed conference in Jackson Hole, Wyoming, Bernanke called unemployment a “grave concern” and defended the use of nontraditional policy tools, saying “we should not rule out” their future use.
Stocks have climbed on bets the Fed will increase stimulus. The Standard & Poor’s 500 Index has gained 2.1 percent since Bernanke’s Jackson Hole speech and is up 9.1 percent this year.
Extending the time horizon for low rates to 2015 appears to be “a done deal” because Fed officials are “not getting what they expected in terms of the unemployment rate,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina.
The jobless rate has been stuck above 8 percent since February 2009, and payroll growth slowed to 96,000 workers in August, fewer than forecast by economists, after a 141,000 increase in July.
Unemployment is inhibiting retail spending, Brian Cornell, chief executive officer for PepsiCo Inc.’s Americas foods unit, said at a conference in Boston Sept. 5.
“We have a very fragile consumer environment right now in the U.S.,” Cornell said. “Unemployment remains very, very high. Food stamp usage continues to grow. And we’ve seen quite a bit of volatility in fuel.”
The weak job market hasn’t convinced every policy maker to endorse an extension of the zero-rate policy.
Richmond Fed President Jeffrey Lacker has dissented from FOMC statements this year endorsing the 2014 date. St. Louis Fed President James Bullard, Richard Fisher of Dallas and Charles Plosser of Philadelphia have also opposed tying interest rates to a date.
Harvard University economist Greg Mankiw, a top adviser to Romney, said in January that Plosser “was right” in saying policy shouldn’t be based on “the calendar.” Stanford University’s John B. Taylor, a Romney supporter, questioned the effectiveness of “forward guidance” in his economics blog Sept. 4, citing Columbia University economist Michael Woodford’s research presented at Jackson Hole.
Setting a date for “lift-off” may send mixed signals and backfire by suggesting policy makers expect the economy to decline, Woodford said. He urged setting an “explicit criterion” for what would trigger higher interest rates. Such clarity may encourage spending, he said.
The Fed may seek to buttress the credibility of a rate forecast extension to 2015 by pairing it with a plan to buy more bonds, said James Hamilton, a professor of economics at the University of California, San Diego.
“The combination of both talking about what you’re trying to do longer-term and also doing something right now in the short-term is the way to be more effective,” said Hamilton, who has been a visiting scholar at the Fed board in Washington.
Bernanke’s asset purchases have drawn fire from Republicans beyond Romney, including House Speaker John Boehner of Ohio. The 2012 Republican platform calls for an audit of the Fed’s monetary policy.
The Fed chairman’s departure might lead to a shift in policy, said Robert Eisenbeis, chief monetary economist at Sarasota, Florida-based Cumberland Advisors and former research director at the Atlanta Fed.
“The next chairman that would come in could sway the committee in a different way,” he said. “That commitment is only contingent upon who’s on the committee. They can change their views.”
If Bernanke begins a third term in 2014, he may face opposition from three regional Fed bank presidents who will hold voting power that year: Plosser, Fisher and Narayana Kocherlakota of Minneapolis. All have repeatedly voiced concern that Bernanke’s unprecedented accommodation may fuel inflation.
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