Two Fed Presidents Emphasize Stimulus to Persist After QE TaperJoshua Zumbrun, Aki Ito and Steve Matthews
Two Federal Reserve presidents who differ over the need for more stimulus emphasized that monetary policy remains accommodative, less than a week after a timeline to reduce bond purchase jolted financial markets.
“What we’re talking about here is dialing back,” Richard Fisher, president of the Federal Reserve Bank of Dallas, said in London yesterday. “The word ‘exit’ is not appropriate here,” said Fisher, who doesn’t vote on policy this year and has been critical of the Fed’s easing policies.
Minneapolis Fed President Narayana Kocherlakota, who has called for easier policy, said yesterday the Fed must emphasize in its statement that policy will remain accommodative “for a considerable time” after the end of quantitative easing. “We have to bring that forward and hammer it every time we talk about policy,” Kocherlakota, who also doesn’t vote this year, said to reporters in a conference call.
Fisher and Kocherlakota both vote next year on the Federal Open Market Committee, when the members will be deciding when to end asset purchases, assuming they follow the timeline set out last week by Chairman Ben S. Bernanke. New York Fed President William C. Dudley, who has a permanent vote on the panel, said on June 23 the Fed has been too optimistic about the economy in the past.
The Fed officials’ comments highlight the challenges they confront while seeking to lay out a strategy for curtailing the asset purchases that have pushed the Fed’s balance sheet to a record $3.47 trillion. The Standard & Poor’s 500 Index has fallen 4.8 percent since June 18, the day before Bernanke said the Fed could start reducing $85 billion in monthly bond purchases this fall and end them in the middle of next year if the economy meets the Fed’s forecasts.
Kocherlakota and Fisher dissented against two decisions by the FOMC in 2011, opposing actions to add stimulus.
In September 2012, Kocherlakota announced in a speech that his views had changed, citing low inflation and research that suggested high unemployment was driven by economic weakness and not structural changes in the labor market. Fisher has remained among the most vocal critics of the Fed’s record accommodation.
The two Fed regional bank presidents yesterday signaled they weren’t worried about investors’ response to last week’s policy announcements.
The Standard & Poor’s 500 Index slid 1.2 percent yesterday to 1,573.09. The yield on the 10-year Treasury note traded at 2.54 percent late yesterday in New York, an increase from 2.19 percent on June 18.
Kocherlakota said the market’s reaction to the Fed statement “so far is not a cause for concern.” At the same time, if yields continue to stay higher, “that would be restrictive to economic conditions” and suppress both prices and employment.
Speaking to reporters after his speech, Fisher said he was “not uncomfortable” with the current level of Treasury yields.
Investors shouldn’t overreact to the central bank’s plan to reduce the pace of asset purchases, the Dallas Fed chief said in an interview with the Financial Times published yesterday on its website. Investors behaved like “feral hogs” after the June 19 comments by Bernanke, he said, according to the newspaper.
“Fed policy is absolutely stimulative, and the federal funds rate remains at zero,” said Charles Lieberman, chief investment officer at Advisors Capital Management LLC in Hasbrouck Heights, New Jersey, and former head of monetary analysis at the Federal Reserve Bank of New York.
The end of bond buying by the central bank should be tied to a threshold for the unemployment rate, Kocherlakota said. The jobless level in May was 7.6 percent.
“The committee should continue to buy assets at least until the unemployment rate has fallen below 7 percent,” he said. The purchases should continue “as long as the medium-term outlook for the inflation rate remains below 2.5 percent and longer-term inflation expectations remain well anchored,” he said.
Fed presidents typically don’t issue statements and hold press briefings reacting to the FOMC statement. Instead, they usually describe their views in speeches and in media interviews.
“It is a little unusual for a non-voting member to put out a statement,” said Michael Hanson, senior U.S. economist for Bank of America Corp. in New York. Fed officials attempting to clarify the Fed’s intent are “challenged between finding simple ways to communicate with the markets and comprehensive ways to communicate with the markets,” said Hanson, a former Fed economist.
Bernanke last week emphasized that decisions to alter the pace of asset purchases depend on the economy’s performance, and that the Fed has “no deterministic or fixed plan” to end purchases. Policy makers last week issued new forecasts for economic growth that are more bullish than those of private economists.
Fisher yesterday backed Bernanke’s message, saying he favors tapering the purchases if the economy makes the kind of progress officials forecast.
Prior Fed forecasts have missed the mark, Dudley said on June 23.
“Despite an aggressive shift towards greater monetary policy accommodation in 2008 and 2009, and ongoing subsequent easing -- which has supported a return to growth and helped to facilitate needed adjustments in housing and household balance sheets -- the economic recovery has been consistently weaker than forecast,” he said in a speech in Basel, Switzerland.
“As a result, the Federal Reserve has fallen short of meeting its employment and inflation objectives,” he said. “This suggests that with the benefit of hindsight, U.S. monetary policy, though aggressive by historic standards, was not sufficiently accommodative relative to the state of the economy.”