October 25, 2020

Economix Blog: The Fed Splits

FLOYD NORRIS

FLOYD NORRIS

Notions on high and low finance.

There is more than meets the eye to the split at the Federal Reserve. There must be.

The Fed’s statement Tuesday afternoon says that the majority “currently anticipates that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

Three dissenters said that they “would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.”

Now there’s something to fight over. I say we need low rates “at least through mid-2013.” You say “an extended period.”

All this sounds like much ado about very little, but the Fed majority is all but promising that rates will stay low for nearly two years. We used to think “an extended period” could mean a few months.

In reality, the statement was an implicit invitation to traders to drive rates down further on the two-year Treasury note, and that happened immediately. Before the announcement the two-year rate was around 0.27 percent. Now it is 0.19 percent. That is a record low. Two weeks ago it was over 0.4 percent.

The initial stock market reaction was negative, presumably because there was some hope that the Fed would do more — like start another quantitative easing program, QE3. Instead there is a promise that the Fed “will maintain its existing policy of reinvesting principal payments from its securities holdings. The committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”

In other words, they might do a QE3. Or they might not.

Perhaps the dissenters really want to essentially say something like “We’ve done all we can, and if the economy is still lousy, that is for someone else to deal with.” And the majority is unwilling to do that.

As it is, the Fed has signed on to the widespread perception that the economy is getting worse. But it is not doing a whole lot.

The fact that the Fed chairman, Ben S. Bernanke, now has three dissenters is a sign that the Fed, like one or two other Washington institutions you might be able to name, is less and less able to speak with one voice.

Article source: http://feeds.nytimes.com/click.phdo?i=61f732b352df3e35e5ee1d69d7cc0d86

Economix: The Fed Splits

FLOYD NORRIS

FLOYD NORRIS

Notions on high and low finance.

There is more than meets the eye to the split at the Federal Reserve. There must be.

The Fed’s statement Tuesday afternoon says that the majority “currently anticipates that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

Three dissenters said that they “would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.”

Now there’s something to fight over. I say we need low rates “at least through mid-2013.” You say “an extended period.”

All this sounds like much ado about very little, but the Fed majority is all but promising that rates will stay low for nearly two years. We used to think “an extended period” could mean a few months.

In reality, the statement was an implicit invitation to traders to drive rates down further on the two-year Treasury note, and that happened immediately. Before the announcement the two-year rate was around 0.27 percent. Now it is 0.19 percent. That is a record low. Two weeks ago it was over 0.4 percent.

The initial stock market reaction was negative, presumably because there was some hope that the Fed would do more — like start another quantitative easing program, QE3. Instead there is a promise that the Fed “will maintain its existing policy of reinvesting principal payments from its securities holdings. The committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”

In other words, they might do a QE3. Or they might not.

Perhaps the dissenters really want to essentially say something like “We’ve done all we can, and if the economy is still lousy, that is for someone else to deal with.” And the majority is unwilling to do that.

As it is, the Fed has signed on to the widespread perception that the economy is getting worse. But it is not doing a whole lot.

The fact that the Fed chairman, Ben S. Bernanke, now has three dissenters is a sign that the Fed, like one or two other Washington institutions you might be able to name, is less and less able to speak with one voice.

Article source: http://feeds.nytimes.com/click.phdo?i=61f732b352df3e35e5ee1d69d7cc0d86

As Stimulus Nears End, Fed Signals Focus on Rates

The minutes, closely watched for any signs of change in Federal Reserve monetary policy, were released as the central bank was nearing the close of its program to buy $600 billion in Treasury securities by the end of June — its main effort to pump money into the economy as a stimulus.

Economists and the financial markets will be parsing the language of the central bank and its officials in the coming weeks for signs of what the central bank might do when that program ends.

The minutes made clear that the Fed committee had made no decision on its next move but was debating its options. They said that the committee was continuing to reinvest principal payments from securities holdings and that it would finish its program, announced late last year, of buying the Treasury securities. The bank will also maintain the federal funds rate of zero to one-quarter percent.

The minutes said there were no dissents among the 10 policy makers involved in the decision.

Still, the range of views presented in the April minutes emphasized the debate that is taking place as the bank nears the end of its stimulus program, also known as quantitative easing. This debate will only become sharper over the next month; the committee meets again June 21-22.

Most of the policy makers favored raising the federal funds rate before selling securities, giving the central bank the option to adjust it if needed should there be weaker economic growth. A “few” participants preferred that sales and increases in the rate should take place at the same time, and a few preferred that sales begin before any increases. The minutes also said that almost all the members of the committee believed that reinvestments from securities should be stopped as the first step. Most said the timing of asset sales should be announced, with several members saying they could vary with the economic outlook.

“Most participants saw changes in the target for the federal funds rate as the preferred active tool for tightening monetary policy when appropriate,” the minutes said.

Joshua Shapiro, chief United States economist at the research firm MFR, said the minutes put a “finer focus” on the Fed’s strategy for exiting the program.

“That was in the minutes for the first time in terms of nuts and bolts,” he said. “It was the first time that we really got something down on paper that seems to be a road map in terms of what they are talking about.”

Gregory Daco, a senior economist with IHS Global Insight, said he believed that the committee would let the bank balance sheets shrink toward the end of 2011, and start moving rates back up in early 2012.

There seemed to be overall agreement on what steps were needed, but not the sequence, in the minutes. “They have studied the options,” Mr. Daco said. “Agreeing on a strategy not to reinvest payments of principal on securities would reduce the balance sheet. That would be in itself a first tightening of monetary policy.”

Stock prices on Wall Street rose after the release of the minutes.

The Federal Reserve chairman, Ben S. Bernanke, held a news conference immediately after the April meeting, the first such event by any Fed chairman.

Mr. Bernanke, speaking last month, had said that there would be no changes in short-term rates for several meetings. The committee meets eight times each year.

Energy and food prices rose in the first quarter, the minutes noted, with a small uptick in core price inflation, and the government’s official unemployment rate, which reflects the share of the labor force actively seeking jobs, rose to 9 percent in April from 8.8 percent in March.

The committee projected that the unemployment rate would decline gradually, while revising up their inflation projections, even though they said higher inflation would be “transitory.”

Over all, conditions pointed to a “moderate economic recovery,” despite unexpectedly slowing growth in the first quarter.

Article source: http://feeds.nytimes.com/click.phdo?i=6ba4fc39ed89cf2ab902a17d2e55aa89