For my money the most interesting piece of Fedspeak today was some coded support for further easing from John Williams of the San Francisco Fed. Mr Williams wasn’t exactly gung ho, but his words were fairly clear.
“Right now, though, the real threat is an economy that is at risk of stalling and the prospect of many years of very high unemployment, with potentially long-run negative consequences for our economy. There are a number of potential steps the Fed could take to ease financial conditions further and move us closer to our mandated goals of maximum employment and price stability. Of course, these “treatments” won’t make our economic problems go away and their costs and benefits must be carefully balanced. But they could offer a measure of protection against further deterioration in the patient’s condition and perhaps help him get back on his feet.”
Mr Williams also set out an economic forecast that is notably grim on unemployment. He forecast 2 per cent annualised growth in the second half of 2011, but unemployment above 9 per cent at the end of this year, and most importantly, above 8.5 per cent at the end of 2012. Mr Williams also referred to ‘stall speed’ implying that he sees plenty of downside risk. You would certainly want to ease with that forecast.
My running count of regional Fed presidents now makes it six stated opponents to the mid-2013 time commitment and thus likely opponents to further easing (Bullard, Fisher, Hoenig, Kocherlakota, Lacker, Plosser); one strong and one moderate supporter of further easing (Evans, Williams); one on-record as neutral-for-now (Lockhart); and three from whom I haven’t spotted public remarks but who I’d guess are supportive of further easing (Dudley, Pianalto, Rosengren).
Charles Evans of the Chicago Fed is continuing to act as the main FOMC advocate for economic intellectuals who, following Michael Woodford amongst others, argue that the answer to a liquidity trap is to promise a certain amount of short-term inflation in order to drive down real interest rates.
In essence, his argument about the need for action is that the output gap is huge, so even if you place greater weight on inflation then it still calls for the most radical measures you can come up with. It’s interesting to see him pushing against the Taylor Rule, however, and talking about optimum control instead.
Mr Evans restated his proposal of promising to keep rates extremely low as long as the unemployment rate is above 7.5 per cent and the inflation rate remains below 3 per cent. I think that’s a much more realistic way to try to capture the benefits of commitment than a price level target. But I detect no sign at all that Mr Evans is winning this argument with his colleagues just yet.