MacroScope

Pigeonholing Fed hawks

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.

Regional Fed hawks tend to argue that the Fed should not overreach in its efforts to bring down unemployment because the only thing it can really control in the long-run is inflation. Says Jeffrey Lacker, president of the Richmond Fed:

In contrast to inflation, which over time is determined by central bank actions, real economic growth and labor market conditions are affected by a wide variety of factors outside a central bank’s control.

So what should we make of the recent decline in the Fed’s preferred measure of inflation to just around half of the central bank’s 2 percent target. Has the Fed lost its ability to influence consumer prices, or is it just not trying hard enough?

From one central banking era to another: beware the consequences

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.

“There are going to be big losses at central banks at someplace along the line,” he said. “You do all this support of buying longer term securities at very low interest rates; long term interest rates aren’t going to stay where they are forever; at some point losses are going to be taken.”

Yellen-san supportive of BOJ’s aggressive easing

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.

So I asked Yellen, seen as a potential successor to Fed Chair Ben Bernanke when his second term ends early next year, what she thought of Japan’s decision to launch a bold $1.4 trillion stimulus to fight a long-standing problem of deflation and economic stagnation.

Goal line on jobs still a long way off: former Fed economist Stockton

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.

A lot of people have been quite excited about some of the recent strength in the labor market. It’s encouraging but I don’t think we’ve yet seen any clear break out and I don’t think we’re going to for a while.  […]

Don’t call it a target: The thing about nominal GDP

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:

So the Fed’s mandate is, of course, a dual mandate. We have a mandate for both employment and for price stability, and we have a framework in place that allows us to communicate and to think about the two sides of that mandate. We talked today – or yesterday, actually – about nominal GDP as an indicator, as an information variable, as something to add to the list of variables that we think about, and it was a very interesting discussion. However, we think that within the existing framework that we have, which looks at both sides of the mandate, not just some combination of the two, we can communicate whatever we need to communicate about future monetary policy. So we are not contemplating at this date, at this time, any radical change in framework. We are going to stay within the dual mandate approach that we’ve been using until this point.

Bernanke on Sen. Warren and too big to fail banks: ‘I agree with her 100 percent’

I asked Fed Chairman Ben Bernanke during his quarterly press conference this week if the central bank had its own estimate for the implicit subsidy that banks considered too big to fail receive in the form of cheaper borrowing. Senator Elizabeth Warren had confronted him at a recent hearing with a Bloomberg estimate of $83 billion which itself was derived from an IMF study. At the time, he dismissed her concern: “That’s one study Senator, you don’t know if that’s an accurate number.”

At the press briefing, Bernanke said the Fed does not have its own figures for Wall Street’s too-big-to-fail subsidy, in part because there were too many factors that made it difficult to calculate.

However, this time around, he seemed more sympathetic to Warren’s concerns than he had at the Senate Banking Committee hearing.

For whom the bell will not toll: Fed ditches old-school tech in policy release

It’s had a good run, and will remain in use for the purposes of alerting reporters that “Treasury is in the (press) room.” But when it comes to the Federal Reserve’s monetary policy decisions, which are also released out of Treasury, the central bank is ditching the old ringer.

Until the last FOMC decision, reporters would be guided by a 10 second countdown followed by a loud clinging of the bell pictured above. Now, news agencies will report the news at the set time of 2 pm – so there’s no wiggle room in the hyper competitive world of microsecond timings that give robot-traders an edge.

Given that this is how most other official economic releases are disseminated, the shift makes a lot of sense. Still, there was just something about that bell.

Missing definition in 1982 Fed glossary: quantitative easing

It’s not difficult to see why quantitative easing was not high on the Federal Reserve’s list of priorities in 1982. The term was nowhere to be found in the handy booklet pictured above, which I found while perusing the shelves of Reuters’ two-desk bureau inside the U.S. Treasury. Paul Volcker’s Fed was still battling runaway inflation, so policy options designed for a zero interest rate environment were nowhere near the horizon.

More interesting, perhaps, is what the pamphlet’s brief introduction says about a technology that is now so commonplace it is overlooked — and about the social milieu of central bankers.

These days, it would be quite reasonable for an expert in ‘EFTS’ to inform a co-worker that he used a ‘debit card’ at an ‘ATM’ to get money to buy a tennis racket.

Texas-sized jobs growth turns puny? Don’t y’all believe it, Dallas Fed says

Is the pickup in U.S. jobs growth over before it even started? That’s the conclusion you might reach if you checked out the latest Texas employment update from the Dallas Fed , which shows the Lone Star state added only 4,000 jobs in January.Texas, as boosters like Dallas Fed President Richard Fisher never tire of pointing out, has been an enormous engine of job growth for the United States since the end of the Great Recession.

The state added 335,000 jobs last year. For it to generate a paltry 4,000 jobs in January – well, that sounds like bad news.

Dallas Fed chief regional economist Pia Orrenius isn’t a bit worried. Last year’s data also came in too low initially – what turned out to be 3.1 percent growth was originally estimated at 2.5 percent growth. “Nothing happened to suggest we suddenly slowed in January,” she said in a phone interview. The regional Fed’s manufacturing survey was strong, and the oil rig count was up, she said. Both November and December’s initial jobs figures were revised up sharply, she said. As for January, “We expect this will be revised up as well.” Stay tuned for those revisions then. The state’s run as a driver of U.S. employment growth  may not be over yet.

Is Ben Bernanke becoming a closet Democrat?

 

Watching Ben Bernanke testify before Congress in recent years, it’s hard to shake the feeling that this is a Fed Chairman who has been largely abandoned by his own party. Hearing after hearing, Bernanke receives steady support and praise Democrats for his efforts to stimulate a fragile economic recovery – and takes constant heat from Republicans for what they perceive as the possible dangers of low interest rates.

Many people forget Bernanke was first nominated to his current role by a conservative Republican president, George W. Bush. Bush, though he was reappointed to a second term by President Barack Obama. Bush first named Bernanke to the Fed’s board in 2002, then brought him to the White House to lead his Council of Economic Advisors.

In his recent biannual testimony on monetary policy, Bernanke had quite the exchange with Bob Corker, a Republican Senator from Tennessee. The tone of his question was immediately confrontational: