Reuters blog archive
The ‘taper tantrum’ of May and June, as the mid-year spike in interest rates became known, appears to have humbled Federal Reserve officials into having a second look at their convictions about the power of forward guidance on interest rate policy.
Take James Bullard, president of the St. Louis Fed. He acknowledged on Friday that the Fed’s view of the separation between rates guidance and asset purchases had not been fully accepted by financial markets. “This presents challenges for the Committee,” he noted.
A decision to modestly reduce the pace of asset purchases can still leave a very accommodative policy in place to the extent forward guidance remains intact.
The Committee needs to either convince markets that the two tools are separate, or learn to live with the joint effects of tapering on both the pace of asset purchases and the perception of future policy rates.
You have to give Federal Reserve Chairman Ben Bernanke credit for standing his ground on data-dependence. Despite widespread suspicions, including on this blog, that the central bank would begin reducing the pace of its bond-buying stimulus in September simply because the markets were expecting it, the Fed chose to hold off in the face of a still-fragile economy.
Here’s how Bernanke addressed the issue of the market’s surprise at the Fed’s decision at his press conference:
Not to mix too many animal metaphors but, generally speaking, monetary policy hawks also tend to bulls on the economy. That is, they are leery of keeping interest rates too low for too long because they believe growth prospects are stronger than economists foresee, and therefore could lead to higher inflation.
That is not the case, however, for Richmond Fed President Jeffrey Lacker, a vocal opponent of the central bank’s unconventional bond-buying stimulus program, particular the part of it that focuses on mortgages. He reiterated his concerns last week, saying the Fed should begin tapering in September by cutting out its mortgage bond buying altogether.
Richard Leong contributed to this post
John Kenneth Galbraith apparently joked that economic forecasting was invented to make astrology look respectable. You were warned here first that it would be especially so in the case of the first snapshot (advanced reading) of U.S. second quarter gross domestic product from the U.S. Bureau of Economic Analysis.
Benchmark revisions to U.S. gross domestic product made for a bit of a mayhem for forecasters, who were way off the mark in predicting just 1 percent annualized growth when in fact the rate came it at 1.7 percent. Morgan Stanley had predicted a gain of just 0.2 percent.
Composure restored. Despite gut-clenching stock market swoops and a violent 100 basis point upward spike in 10-year bond yields since the Fed's June 19 meeting and press conference with Chairman Ben Bernanke, financial conditions are still very easy.
That ought reassure officials at the U.S. Federal Reserve that some normalcy has been restored in financial markets after the abrupt reaction to their decision to signal they would scale back bond purchases later this year.
The following is a statement from the St. Louis Fed following the decision by its president, James Bullard, to dissent from the U.S. central bank's decision to signal a looming reduction in its bond-buying stimulus program:
Federal Reserve Bank of St. Louis President James Bullard dissented with the Federal Open Market Committee decision announced on June 19, 2013. In his view, the Committee should have more strongly signaled its willingness to defend its inflation target of 2 percent in light of recent low inflation readings. Inflation in the U.S. has surprised on the downside during 2013. Measured as the percent change from one year earlier, the personal consumption expenditures (PCE) headline inflation rate is running below 1 percent, and the PCE core inflation rate is close to 1 percent. President Bullard believes that to maintain credibility, the Committee must defend its inflation target when inflation is below target as well as when it is above target.
Ann Saphir contributed to this post
The apparent conclusion from one of the most dovish regional Federal Reserve banks was rather surprising: The economy may actually need much smaller monthly job growth, of around 80,000 or less, in coming years in order for the jobless rate to keep moving lower. The immediate policy implication, it might seem, is that the U.S. central bank may have to tighten monetary policy much sooner than previously thought.
Andrew Brenner of National Alliance remarked that, while the report should be taken with a grain of salt, “this translates to lowering the bar to QE tapering.”
Is Federal Reserve Chairman Ben Bernanke avoiding the word “taper” in order to temper expectations that the U.S. central bank will ratchet down its massive bond buying program? This is one view that’s been widely bandied about in recent days.
But then why is it that the Fed officials who are most eager to "taper" have pretty much stopped using the word, too?
MacroScope is pleased to announce the launch of ‘Ask the Economist,’ which will give our readers an opportunity to directly ask questions of top experts in the field. We are honored that Michael Bryan, senior economist at the Federal Reserve Bank of Atlanta, has agreed to be our first guest. In his role, Bryan is responsible for organizing the Atlanta Fed's monetary policy process. He was previously a vice president of research at the Cleveland Fed.
The process is simple. We give you a heads up on our upcoming featured economist. You tweet us your question using the hashtag #asktheeconomist, or via direct message if you prefer. We select a handful of the most interesting queries this week, ship them over to our economist du jour. She or he will then answer each one in writing and we will post their response as a blogpost. And of course, you’ll be cited for asking the pithy question.
Vincent Reinhart, a former top Federal Reserve researcher who is now chief U.S. economist at Morgan Stanley, believes the U.S. central bank will begin pulling back on the pace of asset purchases in December. Here’s how he arrives at that timeline:
We believe the Fed is going to need to see four employment reports averaging net gains in nonfarm payrolls of at least 200,000 to justify reducing the pace of its asset purchases. The arithmetic of the calendar would then put the earliest date of tapering/tightening in September, which conveniently for the Fed is a meeting followed by a press conference.