MacroScope

Romer, taking aim at Fed, advocates ‘regime change’ and a shift to nominal GDP

By Alister Bull

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Christina Romer, former chair of the White House Council of Economic Advisers and a strong advocate for Janet Yellen to take over from Ben Bernanke as the next chair of the Federal Reserve, slammed the Fed in a lecture last week that accused the U.S. central bank of being too meek and of fighting the wrong battle by being fixated on asset bubbles.

Romer, sometimes touted as a potential candidate to fill one of the 3 vacancies on the Fed’s Board in Washington, or maybe run a regional branch (Cleveland has an opening), also discussed deliberately aiming for 3 or 4 percent inflation, as well as targeting nominal GDP.

One key observation from her remarks was central banks must tackle financial instability head-on. The Greenspan-era disdain for using monetary policy to burst asset bubbles has become a luxury which the post-crisis world can no longer afford:

“As hard as it is to spot a bubble in real time, monetary policy makers need to try, and to take steps to slow it down. This doesn’t mean they should fixate on bubbles and fear them lurking around every corner. But we now know that thinking we can just ignore them is a very bad strategy.”

Romer delivered the lecture at Johns Hopkins University event in Washington on Oct. 25. It was called: “monetary policy in the post-crisis world: lessons learned and strategies for the future“.

Congress “smashed the instrument panel” of U.S. economic data: Fed’s Fisher

Richard Fisher, president of the Dallas Federal Reserve and one of the U.S. central bank’s arch inflation hawks, took us by surprise this week – he told Reuters that, given all the uncertainty generated by the government shutdown, it would not be prudent for the Fed to reduce its bond-buying stimulus this month.

“It is just too tender a moment,” he said. That was on Tuesday, before a last-minute deal averted a debt default but set up additional uncertainty by pushing the statutory spending cap into February.

Fisher said he wishes the Fed had begun the so-called ‘tapering’ process in September as markets has expected. But while he did not rule out a pullback from the current $85 billion monthly pace of asset purchases in December, he did acknowledge the next couple months of data could be “noisy” as economists try to weed out temporary shutdown effects from the broader trend.

Time for Fed to rethink its forward guidance?

Federal Reserve officials have largely acknowledged by now that leading markets to believe the central bank would reduce its bond buying stimulus in September and then failing to do so was a communications blunder.

For Zach Pandl, a former Goldman economist now at Columbia Management, this means the Fed may have to reshape its guidance to financial markets – even if the exact contours of the changes remain unclear.

Last month’s surprise may have increased the odds that the committee will rework its forward guidance in some way (though this will depend importantly on the identity of the next Fed Chair).

Fed doves strike back


Now that Washington’s circus-like government shutdown has put a damper on hopes for stronger U.S. economic growth going into next year, dovish Federal Reserve officials again appear to have the upper hand in the way of policy commentary.

Take Eric Rosengren, the Boston Fed President who had been unusually quiet as the tapering debate gathered steam. In a speech in Vermont on Thursday, he returned to a familiar theme – the central bank still has plenty of firepower and should not be afraid to use it.

Unfortunately, most of the risks to the outlook remain on the downside. Concerns over untimely fiscal austerity here and abroad, and the possibility of problems once again emerging in parts of Europe, could cause the Federal Reserve to miss on both elements of its dual mandate – employment and inflation – through 2016.

How big is the Fed’s communications gap? Six months, give or take

You have to give Federal Reserve Chairman Ben Bernanke credit for standing his ground on data-dependence. Despite widespread suspicions, including on this blog, that the central bank would begin reducing the pace of its bond-buying stimulus in September simply because the markets were expecting it, the Fed chose to hold off in the face of a still-fragile economy.

Here’s how Bernanke addressed the issue of the market’s surprise at the Fed’s decision at his press conference:

I don’t recall stating that we would do any particular  thing in this meeting. What we are going to do is the right thing for the economy. And our assessment of the data since June is that, taken collectively, that it didn’t quite meet the standard of satisfying our – or of ratifying or confirming our basic outlook for, again, increasing growth, improving labor markets, and inflation moving back towards target. We try our best to communicate to markets – we’ll continue to do that – but we can’t let market expectations dictate our policy actions. Our policy actions have to be determined by our best assessment of what’s needed for the economy.

As election passes, German election keeps on chugging

Germany’s Ifo sentiment index is the big data release of the day and is forecast to continue its upward trajectory after the country’s PMI survey on Monday showed the private sector growing at its fastest rate since January.

Surveys have been strong through the last quarter, putting a question mark over the downbeat European Central Bank and German government forecasts for the second half of the year. The currency bloc as a whole looks set to pretty much replicate its 0.3 percent growth in the second quarter, nothing spectacular but a sign that recession is probably a thing of the past. The German economy rebounded strongly in the second quarter, growing by 0.7 percent. It might not quite match that in Q3 but it may not be far off.

After the Federal Reserve took its finger off the trigger, emerging markets have enjoyed some welcome respite. Hungary’s central bank meets today having cut interest rates by just 20 basis points in August, ending a run of successive quarter-point cuts stretching back into last year.

Back from the brink

Pulling back from the brink. The Federal Reserve certainly has and so has Silvio Berlusconi (so far).

Not much to say about the Fed directly, except that it’s surely still only a matter of time, but it certainly takes the pressure off the central banks meeting in our region today. German Bund futures have leapt about 1-1/2 points and Italian bond futures are up more than a full point. We can expect emerging market assets to climb sharply too – the Turkish lira is up three percent, for example, giving its embattled central bank some breathing space.

Further out though, what this has done is create more uncertainty rather than giving investors a firm direction of travel. Presumably, Bernanke and co. are somewhat alarmed about the durability of U.S. economic recovery, which should give everyone pause for thought.

A market-dependent Fed?

It’s hard to shake the feeling that the Federal Reserve is about to begin pulling back on stimulus not just on the back of better economic data, but also because financial markets have already priced it in. The band-aid ripping debate over an eventual tapering of bond purchases that started in May was so painful, Fed officials simply don’t want to go through it again.

If anything, recent data have been at best mixed, at worst worrisome. In particular, August job growth was disappointing and labor force participation declined further.At the same time, inflation remains well below the central bank’s objective.

Argues Dean Croushore, a former regional Fed bank economist and professor at the University of Richmond:

Note to markets: it’s been September all along for the Fed taper

Now that the outcome of one of the most anticipated Federal Reserve monetary policy meetings in history is just hours away, most investors and traders have settled on the view that the central bank will announce a plan to trim the pace of its $85 billion in monthly purchases of government and mortgage-backed securities on Wednesday. We just don’t know which, if any, of the two asset classes it will focus on, and by how much it will taper what it buys each month.

What most probably don’t know is that for all the incessant talk in financial markets over the past few months about uncertainty, the timing hasn’t really been in question. The consensus of forecasters polled by Reuters has been pretty clear since Fed Chairman Ben Bernanke hinted in May that quantitative easing might have to slow later in the year.

Fed doves becoming an endangered species

 

It’s official: Instead of policy doves on the U.S. central bank’s Federal Open Market Committee, there are now only “non-hawks.” A research note from Thomas Lam at OSK-DMG used the term in referring to recent remarks from once more dovish officials like Charles Evans of the Chicago Fed and San Francisco Fed President John Williams.

The implied message from the latest Fed comments (or reticence), namely from the non-hawks, is that policymakers are clearly assessing a broader spectrum of considerations – beyond data-dependence – when mulling over the prospect of tapering in September.

Lam neglected to mention the silence from arguably the most dovish Fed member of all, Boston’s Eric Rosengren. He and Evans were at the forefront of calling for continuous and aggressive stimulus in the form of asset purchases. But recently, the Fed as a committee has shifted away from its emphasis on balance sheet expansion toward forward guidance –  thus far with mixed success.