Robin Harding

Robin Harding is the FT's US economics editor, based in Washington. Prior to this, he was based in Tokyo, covering the Bank of Japan and Japan's technology sector, and in London as an economics leader writer. Robin studied economics at Cambridge and has a masters in economics from Hitotsubashi University, where he was a Monbusho scholar. Before joining the FT, Robin worked in asset management and banking.

Robin Harding

Andrew Levin, a Fed staffer who worked extensively on Janet Yellen’s communication reforms when she was vice-chair, sets out a set of principles for central bank communications in a paper at today’s Hoover central banking conference.

He calls for press conferences after every Fed meeting and a quarterly, Bank of England-style monetary policy report. Mr Levin is currently at the IMF but this a direction many Fed officials want to go.

Here are Mr Levin’s principles, with my highlights in bold, and comments in italic: 

Robin Harding

The most newsy point from NY Fed president William Dudley’s speech today was his call for a change in exit strategy, urging the central bank to reinvest in its mortgage portfolio. But there was a lot more going on in the speech: Mr Dudley put a dovish spin on the Fed’s inflation target. He said bank regulation may be driving down neutral interest rates, and he put markets on notice that how they price bonds will decide how the Fed changes interest rates.

(1) Inflation is coming

Mr Dudley’s tone on inflation was different to the isn’t-it-worringly-low type of remarks that Fed officials have tended to make recently. Instead, he expects inflation to head upwards, and seemed to be testing arguments for why Fed policy should not react.

“With respect to the outlook for prices, I think that inflation will drift upwards over the next year, getting closer to the FOMC’s 2 percent objective for the personal consumption expenditure deflator . . . That said, I see little prospect of inflation climbing sharply over the next year or two. There still are considerable margins of excess capacity available in the economy—especially in the labor market—that should moderate price pressures.”

 

Robin Harding

The Fed is locked into bad equilibrium where it is forced to change policy gradually, because that is what markets expect, which in turn means policy works better with gradual changes.

That is the possibility outgoing Fed governor Jeremy Stein has raised in a speech on Tuesday evening. 

Robin Harding

This table is the Fed’s response to researchers who say that only short-term unemployment puts downward pressure on inflation. It comes from a newly published research paper by Michael Kiley, a senior economist on the Fed staff. 

Robin Harding

An independent review of the IMF’s economic forecasts out today basically gives the Fund a clean bill of health, but finds that when making big lending programmes, its initial forecasts tend to be optimistic on growth and pessimistic on budget deficits. 

Robin Harding

I think people are confusing two separate questions in the recent debate about wage rises and spare capacity in the US economy: first, the amount of slack left in the labour market, and second, whether the Fed should deliberately try to overshoot its inflation objective of 2 per cent.

The extent of slack 

Robin Harding

There could be serious financial turmoil when the Fed eventually raises interest rates, even without a lot of leverage in the financial system, according to this year’s paper at the US Monetary Policy Forum in New York. If the analysis is correct then it is an argument against very easy monetary policy – but the paper is quite limited.

(The USMPF, organised by the Chicago Booth business school, is a once-a-year event where a group of market economists present a paper to a gathering of Fed pooh-bahs. The authors this year are Michael Feroli of JP Morgan, Anil Kashyap of Chicago Booth, Kermit Schoenholtz of NYU Stern and Hyun Song Shin of Princeton.) 

Robin Harding

After the Reserve Bank of India’s Raghuram Rajan took the Fed and other developed country central banks to task this week for ignoring turmoil in emerging markets, Richard Fisher, president of the Dallas Fed, gave the standard retort on Friday. He said the US central bank must make policy according to what is best for America.

Doing so means the only reason the Fed would change its monetary policy is if trouble in emerging markets had a direct effect on the US. There are two main channels – exports and financial markets – but neither looks likely to hurt the US unless the EM turmoil gets a lot more severe. Thus while the Fed may make a greater show of consultation, and soak up some flak at the G20, its actions this year are unlikely to change. 

Robin Harding

A quick update as the hoopla builds ahead of today’s Fed decision.

Will they taper?

Based on reporting ahead of the blackout period I put the odds of a taper at roughly 50 per cent for December and 50 per cent for January. We’ve been reporting since October that a December taper was still on the agenda so this shouldn’t be regarded as a sudden or unconsidered development.

Since the blackout started there has been a succession of strong data on retail sales, industrial production and homebuilder confidence. We have also had a budget deal. Therefore, I think the chances of a taper today are more than 50 per cent.

It is hard to call this too confidently, however, because the case for waiting is so easy. 

Robin Harding

I have written masses about the upcoming FOMC meeting, the upshot of which is that a small taper is likely on Wednesday, but not guaranteed because of uncertainty about the growth outlook (and the prospect of an imminent budget crisis). What I want to do here is proceed on the assumption that the Fed tapers and discuss how it might do so. NB: this is analysis based on insight into how the Fed works. If someone had told me exactly what was going to happen it would be on the front page of the paper.

(A) Designing a taper

The first thing to note is that the FOMC did the hard part in June when it set out a tapering scenario that would see asset purchases end in the summer of 2014 with an unemployment rate of about 7 per cent. That scenario explains why there is uncertainty about tapering in September: with the main parameters already decided, the details of September’s decision do not matter that much, so if individual FOMC officials are passionate about a particular point they may be able to influence the outcome.