Curious timing for Fed self-doubt on monetary policy
If there was ever a time to be worried about whether the Federal Reserve’s bond-buying stimulus is having a positive effect on the economy, the last few months were probably not it. Everyone expected government spending cuts and tax increases to push the economic recovery off the proverbial cliff, while the outlook for overseas economies has very quickly gone from rosy to flashing red. But the American expansion has remained the fastest-moving among industrialized laggards, with second quarter gross domestic product revised up sharply to 2.5 percent.
Yet for some reason, at the highest levels of the U.S. central bank and in its most dovish nooks, the notion that asset purchases might not be having as great an impact as previously thought has become pervasive.
Fed Chairman Ben Bernanke’s 2012 Jackson Hole speech, made just a month before the Fed launched a third round of monetary easing, made a strong, detailed case for how well the policy was working.
Model simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy. For example, a study using the Board’s FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.
Contrast that with the far meeker findings of a recent San Francisco Fed analysis of the impact of the second round of asset buys:
The 0.13 percentage point median impact on real GDP growth fades after two years. The median effect on inflation is a mere 0.03 percentage point.
Bernanke did not attend this year’s Jackson Hole conference, but his tone in July testimony was decidedly less vigorous about the likely impact of unconventional policies than a year earlier.
John Williams, the San Francisco Fed’s president, recently published research arguing for erring on the side of caution when employing untested policy instruments. Historically the San Francisco Fed, previously run by Fed Vice Chair Janet Yellen, had a reputation for being among the most dovish of regional central banks.
The Fed’s gradual pivot away from confidence in QE, driven in part by concerns over market bubbles, has underpinned a rapid selloff in Treasury bonds that pushed U.S. borrowing costs to their highest levels in two years. The spike may itself threaten a fragile recovery in housing, with recent indicators suggesting the impact is already being felt.
The prevalent view in financial markets is still that the Fed will begin to pull back on bond buying by around $10-15 billion in September, although that prospect has recently been dented by the rising likelihood of U.S. military action in Syria and a looming fight over the debt ceiling.
Whatever the month, it is clear that the central bank is getting ready to pull back. The Fed’s July policy statement repeated that “the Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation.” But no one is counting on an increase, even if the economy does end up stumbling towards the end of the year.
Is there a time and place for humility and circumspection among central bankers? Definitely. Is that moment now? Perhaps. Let’s check back in six months.