Seein’ double, gettin’ in trouble at the Fed

April 10, 2012

OK, this time, maybe it was a mistake to do the math.

Concluding the Fed was cooler to more monetary easing by trying to tally policymakers who openly expressed support for further stimulus at the March meeting may have led to a distorted picture of where officials’ views stand. Weak March payrolls data underscore the shakiness of this analysis.

First, let’s run the numbers. Minutes of the Fed’s March meeting revealed that “a couple” participants on the policy-setting Federal Open Market Committee thought the economy would need more help from the Fed if things got worse. That head count was a lot smaller than the previous meeting. January minutes had shown “a few” participants thought there should be more easing if things continued as they were. “Other members” at the first meeting of the year had thought the Fed should act if the outlook got worse.

So, comparing the two meetings, some people, including this reporter, thought it was fair to assume that “a couple” was less than “a few” plus “other members.”

Getting specific, it appeared that only two out of ten FOMC members favored more easing if the outlook darkened. The implications seemed huge. Did that mean only two of the most strident Fed doves – Chicago’s Charles Evans? Boston’s Eric Rosengren? New York’s William Dudley? – saw even the potential need for further easing?

Did that mean that the most important decision makers, Chairman Ben Bernanke and Vice Chair Janet Yellen, were now satisfied that the current pace of recovery, however weak, was self sustaining? And how did this apparent confidence square with Bernanke’s warnings that the job market might not be able to sustain gains of more than 200,000 new hires a month with sub-par growth? And the dovish tone of the rest of the March meeting minutes, at which a number saw “non-negligible” risks that job gains might evaporate?

Here’s the fallacy: the minutes don’t say the FOMC took a vote and polled members on whether they would support or oppose further easing. It just means that only two people addressed the issue directly while eight kept their counsel.

So it’s possible that some – Bernanke and Yellen for example – might still believe monetary stimulus may be necessary if growth flags and job market gains stall. They just didn’t register that view in a way the minutes recorded.

To be sure, the Fed edits the minutes very carefully and is cognizant of how they will be received by analysts and journalists who are hypersensitive to even small changes in language. The difference in numbers among those who spoke up about more easing from January to March cannot have been significance-neutral.

But since March’s gloomy payrolls report, the Fed may have been happy to have a little interpretive wiggle room. Perhaps the ambiguity about where policymakers stood on further easing gives them just the latitude Bernanke and Yellen need to keep alive the possibility officials would consider further measures if recent signs of strength prove fleeting.

Yellen is scheduled to speak on policy on Wednesday. Bernanke is due to make remarks on Friday.

A footnote: the March minutes also noted a discussion about additional communications improvements the Fed could take. The central bank has already adopted quarterly press conferences, begun to announce the interest rate path forecasts of its officials, and declared an explicit inflation target of 2 percent, among recent major new moves.

So it’s possible that “additional stimulus,” if necessary, could come first in the form of yet another communications enhancement that has an easing effect – not necessarily another round of bond buying. Officials apparently discussed publishing different possible policy scenarios given changes to the economic outlook.

Just the thing, perhaps, to reassure skittish financial markets that should the outlook worsen, some or most at the Fed would want to ease further — but still keeping QE3 in reserve.

Seeing double yet?


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