Tag Archives: Federal Reserve

All Quiet on the Monetary Front

From the FOMC’s latest statement:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and 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 late 2014.

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. […]

Arguments regarding credibility and how difficult it is to earn in the world of central banking are often brandished about. Central bankers often imply that it’s the most dear and precious thing, and that it should not be squandered at any cost. The Federal Reserve has a lot of said credibility insofar as they are really good at fighting inflation. But that’s where the problem presents itself: that inflation fighting credibility comes at the cost of unemployment fighting credibility (it doesn’t have to, and there are examples of this, but that’s been the popular policy stance in the U.S. and Europe).

Many observers expected a more hawkish stance from the Fed following the positive news of the past few months; that qualifies as bad central banking to me and displays a lack of the appropriate kind of credibility. If they’re going to make explicit remarks such as keeping rates near zero through 2014, which I think they should continue to do, they shouldn’t find it acceptable that people second-guess them. Especially now, when expectations are the primary policy tool! I would find it mighty troubling that an unambiguous and neutral statement–by the Fed’s standards–was interpreted to be good news simply because the bad decisions that were expected didn’t materialize.

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*Most* Signs Point to Continuing Recovery

The economy added a healthy 227,000 net jobs in February, marking the third consecutive month of job growth exceeding 200,000.  The unemployment rate remained unchanged at 8.3%, as the number of newly employed was essentially canceled out by those rejoining the labor force. Perhaps just as important, revisions to previous months’ numbers were significant: an additional 78,000 net jobs were added in December and January than was previously measured. All good news.

So will that continue? Some think we’re in for a few months of less than impressive growth in GDP, which would presumably result in a similar story for labor. Others aren’t convinced of that. Real gross domestic product involves a fair amount of inherent haziness, especially regarding productivity gains and losses. It’s just as likely that a shift in composition and geography of labor in some sectors could contribute to these future reductions in RGDP growth without sacrificing a commensurate number of jobs. For example, rising wages in outsource-destination countries, as well as further decline of the dollar, could lead to a repatriation of some jobs. Hence reduced GDP and more jobs.

A larger concern of mine, however, is one that many commentators share. Barring unforeseen oil induced shocks (ahem, dropping bombs on Iran…ahem), the biggest threat to a sustained recovery is an overzealous Federal Reserve. With core inflation hovering around the Fed’s now explicit target of 2%, it’s to be expected that inflation hawks on the FOMC will start getting louder. Moreover, we should expect certain prices to rise faster than some; an unabated recovery will naturally precipitate higher rent and gasoline prices. This shouldn’t be seen as distressing, although it certainly will. It will be the natural result of i) increased demand for oil as business activity increases and more people drive to work, and ii) pent-up demand for apartments and houses, which was subdued as a result of stagnate new household formation during the recession. There has at least been talk of QE3, or “Sterilized” bond purchases–which is a really informative and helpful thing to call it. If the Fed really wanted to put us over the top, this is the course of action they’d take, especially now. Expectations of QE3 are nearly nonexistent considering the recent improvements in the labor market and economy writ large. That’s why such a move would be unequivocal: the Fed stands behind this recovery.

While I don’t think that’s likely, it’s my hope that they’ll remain at least neutral, rather than tighten policy at a tragic time. There should be enough non-maniacs voting at FOMC meetings at any given time to prevent that.

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