Reuters blog archive
Ann Saphir contributed to this post
Minneapolis Federal Reserve President Narayana Kocherlakota has gone from being one of the U.S. central bank’s more hawkish characters to arguably its most dovish. In line with this transformation, Kocherlakota told a conference sponsored by the University of Chicago’s Booth School of Business that the Fed, despite its extensive bond-buying over the last few years, has not done enough to spur growth.
The FOMC has responded to this challenge by providing a historically unprecedented amount of monetary accommodation. But the outlook for prices and employment is that they will remain too low over the next two to three years relative to the FOMC’s objectives. Despite its actions, the FOMC has still not lowered the real interest rate sufficiently in light of the changes in asset demand and asset supply that I’ve described.
To get a sense of what he means, see the graphs below: U.S. inflation continues to undershoot the Fed’s 2 percent target, and is actually drifting lower, while unemployment, though down from crisis peaks, remains stubbornly high.
Vincent Reinhart, Morgan Stanley’s chief U.S. economist and a former senior official at the Fed's Board, even used the dreaded d-word in his latest research note to clients.
In the barrage of Federal Reserve speakers making the rounds on Thursday, it is notable that San Francisco Fed President John Williams was the one that managed to move markets, allowing the dollar to recover losses. Why did his voice rise above the din? For one thing, he’s seen as a dovish-leaning centrist whose views closely resemble the Bernanke-Yellen core of the central bank.
Plus, he took the oft-abused economy-car analogy in a, er, new direction:
If we were in a car, you might say we’re motoring along, but well under the speed limit. The fact that we’re cruising at a moderate speed instead of still stuck in the ditch is due in part to the Federal Reserve’s unprecedented efforts to keep interest rates low. We may not be getting there as fast as we’d like, but we’re definitely moving in the right direction.
Richard Fisher, the Dallas Fed's outspoken president, is happy to be labeled a monetary policy hawk. After all, he sometimes quips, "doves are part of the pigeon family." That may be so. But thus far, the doves have had the upper hand in the policy debate - and the economic data appear to bear them out.
Fed hawks like Fisher have warned that the U.S. central bank's prolonged policy of low interest rates and asset purchases risks a future spike in inflation. Yet despite the Fed's aggressive efforts, inflation is actually drifting lower, not higher, suggesting there is something to the dovish notion that there is still ample slack in the U.S. economy following a lackluster recovery from the historic slump of 2007-2009.
A sudden turn for the worse across German companies should clinch an interest rate cut from the European Central Bank next week, or in June at the latest.
That's because the latest PMI surveys, which have a decent correlation with economic growth, suggest the German economy shifted back into reverse this month, against the expectations of economists.
All the talk of currency wars is mostly just that – talk. This week’s meeting of the Group of 20 nations at the International Monetary Fund was living proof. Despite speculation that emerging nations would redouble their criticism of extraordinarily low rates in advanced economies, the G20 ended up largely supporting the Bank of Japan’s new and bold stimulus efforts aimed at combating years of deflation.
Mr. currency wars himself, Brazilian Finance Minister Guido Mantega, told reporters Japan’s monetary drive was understandable given its struggle with falling prices and stagnant wages, even if he called for close monitoring of its potential spillover effects.
Discussions about central banking are often belabored by analogies to moving vehicles, which make some sense given that interest rate policy can act both as accelerator and brake on economic activity. Perhaps tired of being in the driver's seat, Minnesota Fed President Narayana Kocherlakota decide to switch gears and talk about clothing instead.
In an attempt to illustrate that interest rates are low because of economic conditions, not the whim of policymakers, Kocherlakota compares monetary policy to a protective jacket that needs to be worn when the weather gets rough but can slowly be removed as the summer approaches.
Paul Volcker’s inflation-fighting era as chairman of the Federal Reserve is quite the opposite of today’s U.S. central bank, which is battling to kick start growth and even stave off deflation with trillions in bond purchases. And it is polar opposite of where the Bank of Japan finds itself today, doubling down on easing to lift inflation expectations after two decades of Japanese stagnation. After all, Volcker ratcheted up interest rates in 1979 and the early 1980s to tame the inflation that had been choking the United States.
So it may come as no real surprise that, talking to students and faculty at New York University on Monday, he had a few concerns about where the world’s ultra accommodative central banks are headed.
For all the talk about clear communications at the Federal Reserve, central bank Vice Chair Janet Yellen's speech to the Society of American Business and Economics Writers ran a rather long-winded 16 pages.
However, while Fed board members generally do not take questions from reporters, there was a scheduled audience Q&A which, at this particular event, meant it was effectively a press briefing.
The Great Recession set the U.S. labor market so far back that there is still a long way to go before policymakers can claim victory and point to a true return to healthy conditions, a top former Fed economist said. The U.S. economy remains around 3 million jobs short of its pre-recession levels, and that's without accounting for population growth.
“The goal line is still a long ways off,” David Stockton, former head of economic research at theU.S.central bank’s powerful Washington-based board, told an event sponsored by the Peterson Institute for International Economics. He sees the American economy improving this year, but believes the recovery will continue to have its ups and downs.
Ask top Federal Reserve officials about adopting a target for non-inflation adjusted growth, or nominal GDP, and they will generally wince. Proponents of the awkwardly-named NGDP-targeting approach say it would be a more powerful weapon than the central bank’s current approach in getting the U.S.economy out of a prolonged rut.
This is what Fed Chairman Ben Bernanke had to say when asked about it at a press conference in November 2011: