Fed Must Give Better Guidance to Market, JPMorgan’s Frenkel SaysNicholas Brautlecht
The Federal Reserve should give more subtle guidance to financial markets rather than pin its policy decisions on unpredictable targets, which can send confusing signals if these fail to materialize as anticipated, said Jacob Frenkel, the chairman of JPMorgan Chase International.
Markets would benefit from a “guidance of economic realities,” the former governor of the Bank of Israel said at the Global Economic Symposium in Kiel, Germany today. “But you have to be very subtle when you go about it.”
The U.S. central bank should also avoid giving dates for policy changes such as an end to its bond buying or a change in interest rates, he said.
Fed Chairman Ben S. Bernanke said in June he expected the bank would complete its bond buying when the jobless level was around 7 percent, linking a policy decision to specific unemployment rates. Policy makers have pledged since December that they won’t consider raising interest rates as long as unemployment exceeds 6.5 percent.
After a decline in August to 7.3 percent for an unexpected reason -- Americans giving up on finding work -- the Federal Open Market Committee’s Sept. 18 decided not to taper its $85 billion in monthly bond buying, bucking economist predictions that it would scale back the purchases that have bolstered credit markets.
“It would be very nice to have a guidance of economic realities,” Frenkel said. Unemployment is not the right measure for guidance as “U.S. unemployment declined much more rapidly than expected by anyone but growth is not generated by that as labor force participation shrank.”
“For a long time the monetary authority decided not to discuss exits, as they did not want to confuse matters, but let’s face it, if you go into a highway, wouldn’t you like to know before you enter if it is a dead-end or it has an exit,” he said at a panel about the future of central banking.
Central banks must also be freed from the burden of “worrisome concerns about financial market stability,” he said. To rebalance the situation, the financial industry needs to increase banks’ capital levels, while lowering their leverage.
“Thirdly, liquidity must be higher than it used to be as much of the crisis arises when we have a lack of liquidity,” he said.