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.) Read more
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. Read more
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. Read more
For the last three years, there has been no breakfast for journalists on the opening day of Jackson Hole, while we write up a dramatic, market-moving speech by Ben Bernanke. It’s a more sedate start this year with a thoroughly wonkish paper by Stanford’s Robert Hall.
There is not much new in it on policy. It starts with a fairly straightforward rundown on why the economy got into such a mess when interest rates hit zero after the financial crisis, and it ends by agreeing with last year’s paper by Michael Woodford on what to do with monetary policy (QE doesn’t work, you need commitments about future policy, not just guidance).
The meat of Mr Hall’s paper is about why inflation did not fall much after the crisis despite high levels of unemployment. This has been a surprise during the last few years: unemployment has not driven down wages in a way that led to deflation. Read more
Jackson Hole, the nearest thing on the central banking calendar to Davos, is upon us again, with some of the world’s most senior monetary officials set to head out to the upmarket Wyoming resort over the next few days.
Unlike the annual bash in the Swiss Alps, however, Jackson Hole, which kicks off on Thursday evening and closes on Saturday night, is usually a bit more than a talking shop. Of late, it has been the venue of choice for Fed chair Ben Bernanke to offer clues on where policy is heading.
But, while tapering looks like it is almost upon us, those hoping for more detail on the pace at which the US central bank will slow its asset purchases will not get it from Bernanke this weekend. Read more
By James Politi in Washington
In his final press conference before heading to Martha’s Vineyard, an island off the coast of Massachusetts, for summer holidays, president Barack Obama was asked about his looming pick to succeed Ben Bernanke as Federal Reserve chairman.
We’ll try to parse his words, like a Fed statement.
On timing – Mr Obama repeated that he would make the decision in the autumn, which technically begins September 22. But some speculate that a choice could come sooner. Mr Obama might take the time over the holiday to ruminate and, perhaps inspired by the Atlantic ocean breeze, even make up his mind one way or the other.
On names – Mr Obama confirmed that Janet Yellen, the vice-chair, and Larry Summers, the former Treasury secretary and a top White House economic adviser in 2009 and 2010, are the leading candidates, mentioning them by name and calling them “terrific people”. Interestingly, he left out Don Kohn, a former Fed vice-chair who he had mentioned as a possibility in meetings with congressional Democrats last week. But he did say there were a “couple of other candidates” too. Read more
By James Politi in Washington
Richard Fisher, president of the Federal Reserve Bank of Dallas, is about as outspoken as it gets when it comes to officials at the US central bank. And in Portland, Oregon on Monday — as he spoke to a conference of state retirement administrators — he waded into the heated battle to succeed Ben Bernanke as the next Fed chairman.
His main message seemed to be that the Fed did not need a “prima donna” at its helm – which naturally led to speculation about whether he was referring to Larry Summers, the former treasury secretary, or Janet Yellen, the current vice-chair, who are the two leading candidates for the post. Read more
By James Politi in Washington
Capping a week flooded with US economic data, July’s job figures are out. So, what did we learn this time around?
1) A mixed bag but the jobs report could favour a later taper
Federal Reserve officials hoping that the July jobs report would provide a decisive answer to their dilemma over when to start tapering the asset purchases are likely to have been sorely disappointed.
The data were a classic mixed bag – with the unemployment rate dropping 0.2 percentage points from 7.6 per cent to 7.4 per cent but payroll growth slowed, running below expectations.
But on the margins, the data are likely to offer proponents of a later taper just a bit more ammunition than supporters of an early taper. The Fed is likely to give more weight to the weaker payrolls “establishment” survey than the stronger but more volatile household survey, which measures joblessness.
The question for fans of slowing down asset purchases at the FOMC’s next meeting on September 17-18 is whether a slight slowing in job creation is sufficient to deter them, and it may not be. And luckily for FOMC members, they still have more than six weeks of data – including another jobs report – to make up their minds. Read more
For many years, one of the most enduring mantras of central banking was along the lines of “we never pre-commit to future actions, because all of the information we have about the state of the economy is already contained in the actions we have just announced”. Now that has been completely abandoned. With the ECB and the BoE changes announced today, the central banks are shouting from the rooftops that “we are all forward guiders now”. Read more
The declines in the prices of bonds and many risk assets since the Fed’s policy announcements last week have followed a sharp rise in the market’s expected path for US short rates in 2014 and 2015. This seems to have come as surprise to some Fed officials, who thought that their decision to taper the speed of balance sheet expansion in the next 12 months, subject to certain economic conditions, would be seen as entirely separate from their thinking on the path for short rates. Events in the past week have shown that this separation between the balance sheet and short rates has not yet been accepted by the markets.
The FOMC under Chairman Bernanke has worked very hard on its forward policy guidance, so there is probably some frustration that the markets have “misunderstood” the Fed’s intentions. Richard Fisher, the President of the Dallas Fed, said that “big money does organise itself somewhat like feral hogs”, suggesting that markets were deliberately trying to “break the Fed” by creating enough market turbulence to force the FOMC to continue its asset purchases. Read more