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.
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.
Earlier this month, Fed Governor Jeremy Stein made waves that are still rippling with a speech on the risks of credit bubbles. The policymaker said that the U.S. central bank could use interest rates, as opposed to the more conventional tool of regulation, to cool overheating in junk bonds and other markets.
Financial markets are again on edge about the direction of Fed policy following the surprisingly hawkish minutes of the January meeting released last week, even if most still expect the central bank to keep buying bonds at the current $85 billion monthly pace at least until the end of the year.
The Federal Reserve is cognizant of the potential costs of its unconventional policies, but the economic benefits from asset purchases are still far greater than the potential costs, Atlanta Fed President Dennis Lockhart told Reuters in an interview from his offices.
Is it full steam ahead for the Fed’s QE3 or is the U.S. central bank having second thoughts? Next week’s veritable assembly line of speeches from Fed officials could help answer that question. Vice Chair and possible Bernanke successor Janet Yellen kicks off the week with remarks to an AFL-CIO conference. She is followed by numerous regional Fed presidents, the bulk of them with hawkish tendencies: Esther George, Jeffrey Lacker, Charles Plosser and Dennis Lockhart on Tuesday, St. Louis’ James Bullard on Wednesday and Thursday, and finally, Cleveland Fed President Sandra Pianalto Friday. Oh, and the Fed’s regulatory point person, board governor Daniel Tarullo, testifies before the Senate Banking Committee on Thursday. The topic is a now-perennial one: “Wall Street Reform.”
Jonathan Spicer contributed to this post
When the Fed adopted thresholds for its low interest-rate policy last December, Fed Chairman Ben Bernanke said they would make “monetary policy more transparent and predictable to the public.” But now that the policy is fully in place, it doesn’t seem that the public and the Fed are predicting the same thing at all. Not even close.
It’s that time again: Fed watchers are already parsing possible changes to the January policy statement, even before it is released. Goldman Sachs economists in particular have identified one passage ripe for some type of tweak — one that could signal the appetite for continued bond buys:
U.S. Federal Reserve policymakers, fresh from a December decision to ramp up asset purchases to help push down borrowing costs, will this year train a sharp eye on jobs.