MacroScope

When the Federal Reserve announced back in August that it expected to keep interest rates at very low levels until at least mid-2013, three top policymakers voted against the decision —  and a number of non-voting officials grumbled as well. St. Louis Fed President James Bullard is one prominent critic of the policy, arguing in a speech last month it ties the central bank down unnecessarily and potentially threatens its credibility if conditions require a course correction:

It is time for the Committee to discard one-time policy changes with fixed end dates. The Committee in the past never contemplated announcing several hundred basis point moves to be completed at a date certain. Yet that is how the Committee behaves today. Research indicates quite clearly that optimal monetary policy should continuously respond to ever-changing economic conditions.

Not to worry, argue two young economists in a paper on VoxEU. Olivier Coibion at William and Mary and Yuriy Gorodnichenko of Berkeley say the move toward using specific time horizons for the purpose of policy guidance is a perfectly consistent next step in the Fed’s gradual push toward greater transparency. They conclude opponents of the policy are misinterpreting its intention:

Given current economic forecasts for 2012-2013, the Fed’s indication that policy rates are likely to remain around zero until at least mid-2013 appears consistent with the historical behaviour of the Federal Reserve. The announced path of policy rates is remarkably close to the projected path (subject to the zero constraint), where the projection is based on what the Fed did in the past, so little evidence exists that the new language should be interpreted as a direct change in policy (beyond possible movement toward increased transparency) or that the Fed has altered the relative weight assigned to inflation and output stabilisation in its objective function.  Instead, our results suggest that, contrary to those who condemn the Federal Reserve for becoming increasingly “dovish”, the FOMC’s projected policy path is well aligned with its historical behaviour and current projections of future macroeconomic activity.

It was his first speech on the economy in almost three years in office, but Daniel Tarullo did not pull any punches. The Federal Reserve Board governor, who tends to focus primarily on regulation, on Thursday called for the central bank to step up its purchases of mortgage bonds:

I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities (MBS), something the FOMC first did in November 2008 and then in greater amounts beginning in March 2009 in order to provide more support to mortgage lending and housing markets.

More broadly, Tarullo made a strong call for further monetary easing, arguing quite dovishly that the recovery is still too weak for the central bank not to take further action.

Will they or won’t they (ease monetary policy further)? The question will again garner investors’ attention this week as Federal Reserve Chairman Ben Bernanke and a number of regional Fed bank presidents take to the podium. The speeches come against a backdrop of ongoing worries about economic growth, but on the heels of a number of releases that were not as bad as feared. The bar remains high for the Fed to actively engage in a third round of quantitative easing or QE3 — it would probably take renewed deflationary rumblings to get there.

For now, the Fed is likely to focus on less drastic steps, such as new ways of communicating its policy targets, to satiate wobbly financial markets’ apparent need for ongoing monetary support. Here is the line-up of speakers for this week:

Bernanke will deliver remarks on ”The Effects of the Great Recession on Central Bank Doctrine and Practice” at the Boston Fed on Tuesday at 1: 15 pm EDT.

Dallas Federal Reserve President Richard Fisher is not one to pull his punches. He was one of three dissenters on the Fed’s most recent move to ease policy, and has argued the move will not only be ineffective but also potentially harmful to jobs. Speaking with reporters after his refreshingly frank defense of his dissent this week, Fisher – an architect of the Fed’s new communications policy aimed at more transparency – suggested there are times when he would prefer to be a bit more demure.

Asked if the Federal Open Market Committee’s gloomy economic outlook in its post-meeting statement last week matched his own, he said: “I think the FOMC does its job to honestly state how it views things. We are in an age of enhanced transparency.”

But that’s not always a good thing, he suggested, especially when the market is not used to getting an unvarnished view. Warning that he was about to make a “bad joke” – and then proceeding with it – Fisher said:

Twitter does have some very strange Trends. These are the things that appear on the right-hand side of the page that show what people are talking about. They more they talk, the more likely it is that something will get listed.  More often than not they are about celebrities such as Justin Bieber.

But today's Worldwide  Trends was particularly unusual.

#ThingsStrongerThanTheKenyaShilling was right up there near the top.

As the graph here shows, the shilling has taken a heavy beating since the Lehman Brother collapse. This is one reason for the Twitter outburst.  "Kenyans are getting fed up," said @oreo_junkie, whose Twitter feed states it is from Nairobi.

And judging by some of the other "answers" to the trendline, it is not a matter for levity in Kenya. "Government's resolve to fight Corruption" was one;  "Stupidity of Kenyans to  reelect the same MPs" was another.

Last month the U.S. Federal Reserve published a new communications policy designed to keep the dissonant voices of central bank officials in check and prevent leaks of market-sensitive information. Among the rules, is a blackout period from the Tuesday before any policy-setting meeting to midnight of the Thursday after during which participants must “refrain from expressing their views about macroeconomic developments or monetary policy issues in meetings or conversations with members of the public.”

So it was curious that on Wednesday, just a day after three members of the Fed’s policy-setting committee revolted against Chairman Ben Bernanke’s pledge to keep interest rates low for the next two years,  one of the dissenters  – Minneapolis Fed President Narayana Kocherlakota – suggested to the Wall Street Journal that his revolt may be only temporary.

On this occasion, I dissented from the Committee’s decision. Regardless, I have nothing but the highest regard for the acumen, integrity, and ability of all other FOMC meeting participants.

When it decided the time was right to crack down on inflation, the European Central Bank did so without the man who is often regarded as its toughest inflation hawk: Bundesbank chief Axel Weber.  The ECB took financial markets by surprise by announcing on Thursday it could raise rates as soon as April — a decision its policymakers reached without Weber even in the room.

The German, who has appeared isolated at times over the last year because of his staunch commitment to price stability above all else, was absent without leave and did not attend the meeting.

“He’s tied up today,” a spokesman for the Bundesbank said of Weber, who last month announced he would step down from the central bank a year before his term ended and that he was no longer a candidate to head the ECB when Trichet’s term expires in October. Weber said his hardline views were not well received by other decision makers.