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:
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.
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.
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.)
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.
The current FOMC meeting, which starts today and concludes tomorrow without a Ben Bernanke press conference, is unlikely to produce much news. Steady movement towards a taper of the $85bn, QE3 programme of asset purchases has been checked by a run of bad economic data since March.
I get no sense that much has changed in the thinking of most FOMC officials. There is still a fair bit of confidence that the underlying state of the economy has improved (see, for example, the comments of Boston Fed president Eric Rosengren). The main effect of weak payrolls and the sequester is to increase uncertainty about the trajectory of the economy. That encourages the status quo – and open-ended QE means the default is continued purchases.
The Boston Fed’s annual economic conference has opened with a paper on labour force participation, presented by two senior Federal Reserve Board economists Christopher Erceg and Andrew Levin, that has pretty dovish implications for monetary policy.
Like most other research on this subject, they find that the big decline in labour force participation since 2007 is mainly cyclical, not structural. More interestingly, they split the “employment gap” — the gap between current employment and maximum possible employment — into an “unemployment gap” and a “participation gap”.
Goldman Sachs is still the Fed’s favourite counterparty for buying and selling Treasuries – or at least it was in the first quarter of 2011. The data comes out two years in arrears and we are now at the period when $600bn of QE2 purchases were in progress.
Goldman got twice as much of that business as anybody else, which is mildly embarrassing for the New York Fed, but reflects the pecking order in the Treasury market. If you know what happened to Citi’s business during that period then please explain in comments.
Today’s speech by Janet Yellen is a mirror of Ben Bernanke last week when it comes to the costs and risks of continued asset purchases. “At this stage, I do not see any [risks] that would cause me to advocate a curtailment of our purchase program,” she says.
Where Ms Yellen, the Fed vice chair, breaks some new ground is on the definition of a “substantial improvement” in the labour market.
A reminder: the Fed says it will keep on buying assets, currently at a pace of $85bn a month, until it gets that substantial improvement. Ms Yellen sets out five measures which basically form a Fed dashboard for the labour market. Here they are:
All markets want from Ben Bernanke when he testifies before Congress on Tuesday and Wednesday is reassurance that he is not getting cold feet about the Fed’s open-ended, $85bn-a-month, QE3 programme of asset purchases. That follows minutes which, while notably vague, showed “many” participants worrying about QE3′s costs and risks.
They are likely to get that reassurance — although maybe not in the most straightforward manner. It is important to note that, when Mr Bernanke testifies, he is speaking for the committee and not for himself. This is the statutory language: