Fed speak wrap-up
Over the past few days almost half the members of the FOMC have given speeches, each of which discussed the relative merits of further policy accommodation. This morning's speech by NY Fed President Dudley was the most notable, not only because of the directness of the message but also because the NY Fed President, as Vice Chair of the FOMC, forms part of the policymaking leadership on the committee. The conclusion of his remarks was transparent: "We have the tools that can provide additional stimulus at costs that do not appear prohibitive. Thus, I conclude that further action is likely to be warranted unless the economic outlook evolves in a way that makes me confident that we will see better outcomes for both employment and inflation before too long." Earlier in Dudley's remarks he mentioned some of the objections to further balance sheet expansion, including the view that reducing long rates would be ineffective in stimulating the economy. In response, he stated that the responsiveness of the economy to lower rates in an environment of deleveraging may be reduced, but it is not zero. He also mentioned the worry that increasing the balance sheet could result in a duration mismatch which could potentially mean capital losses for the Fed balance sheet. This was interesting insofar as Fed officials haven't addressed this topic in public in a while. Dudley noted that the Fed has a large capital cushion, and also that nowhere in the Fed's mandate does it say to promote price stability and maximum sustainable employment so long as it means the Fed makes a profit. Indeed, the emphasis on the legal force of the dual mandate has been a recurring theme in arguing for more monetary stimulus. Dudley also mentioned that $500 billion of purchases corresponds to a fed funds rate cut of around 50 to 75bps. The $500 billion figure may have been by way of example, though now that it's out there it seems likely to become a focal point in thinking about the size of further balance sheet expansion. Other Fed speakers this week, in descending order of friendliness to further QE, included: Evans. The president of the Chicago Fed was pretty clear in his support for further monetary stimulus: "The size of the unemployment gap, combined with the fact that inflation has been running below the level I consider consistent with long-term price stability, suggests that it would be desirable to increase monetary policy accommodation to boost aggregate demand and achieve our dual mandate." Rosengren. It was pretty clear that the Boston Fed President was favorable to further QE: "my firm view is that it is important that policymakers be open to implementing policies consistent with achieving full employment, and an appropriate level of inflation, within a reasonable time frame." Pianalto. The low-profile president of the Cleveland Fed did not state where she stood on the issue of more QE, though noted "stubbornly high unemployment," "too low" inflation, the success of previous asset purchases, and the availability of options if further policy accommodation is needed. While not showing her cards, it seems Pianalto would likely favor further QE, particularly if the leadership was leaning that way. Lockhart. The Atlanta Fed President came the closest to being neutral on the his support for further QE, only noting that the debate on this topic will intensify in coming weeks, which seems a safe bet. Kocherlakota. The Minneapolis Fed President discussed the channels through which QE would work, and concluded that relative to previous QE, "further uses of QE would have a more muted effect on Treasury term premia." Also, weighing the costs and benefits is "even more difficult than usual." While not a firm "no," its hard to see Kocherlakota supporting more QE if the leadership weren't advocating it. On a separate note, in this speech Kocherlakota did not push as hard the view that a good amount of current unemployment is structural unemployment. Interestingly, that view was argued against in speeches by Evans and Rosengren, as well as in research coming out of the Cleveland Fed and the Federal Reserve Board. Fisher. The president of the Dallas Fed stated "in my mind, it is not clear that the benefits of further quantitative easing outweigh the costs." Plosser. No such ambiguity from the Philadelphia Fed President: "I do not support asset purchases of any size at this time."Â |
============================================================================================
Fed’s Dudley Says Further Easing Probably Warranted (Update2)
2010-10-01 13:51:27.293 GMT
(Updates with comment on recession relapse in sixth
paragraph.)
By Scott Lanman and Caroline Salas
Oct. 1 (Bloomberg) -- Federal Reserve Bank of New York President William Dudley said the outlook for U.S. job growth and inflation is “unacceptable” and that more monetary easing is probably needed to spur growth and avert deflation.
“We have tools that can provide additional stimulus at costs that do not appear to be prohibitive,” Dudley, who serves as vice chairman of the Fed’s policy-setting Open Market Committee, said today in a speech to business journalists in New York. “Further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.”
Dudley’s remarks are one of the clearest signs that policy makers will start a second round of unconventional monetary easing as soon as the FOMC’s next meeting Nov. 2-3. While other Fed officials voiced a range of views in speeches this week, Chairman Ben S. Bernanke said yesterday that the central bank has a duty to aid the U.S. economy as the jobless rate holds near 10 percent.
Lowering long-term interest rates by restarting purchases of Treasuries or mortgage debt would have a “significant”
effect on the economy by supporting the value of homes and stocks, making housing and refinancing mortgages more affordable and reducing the cost of capital for businesses, Dudley, 57, said to a Society of American Business Editors and Writers conference.
Deflation Concern
“Both the current levels of unemployment and inflation and the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable,” Dudley said.
“The longer this situation prevails and the U.S. economy is stuck with the current level of slack and disinflationary pressure, the greater the likelihood that a further shock could push us still further from our dual mandate objectives and closer to outright deflation.”
Responding to questions afterward, Dudley said he’s not concerned the U.S. will relapse into recession and that he’s expecting the current 2 percent growth to “gradually accelerate.”
“What I’m less confident about is how fast we’re going to get back to our objectives” of price stability and full employment, he said.
Treasuries declined after reports showed U.S. consumer spending rose more than forecast in August and manufacturing in China expanded at the fastest pace in four months in September.
The yield on 10-year Treasury note rose to 2.56 percent at 9:28 a.m. in New York from 2.51 percent yesterday.
‘Credible’ Plan
The risk that inflation expectations rise because of asset purchases can be countered by a “credible” plan from the Fed to exit the unprecedented stimulus with tools such as term deposit accounts, Dudley said. Also, “there is nothing to worry about” on expanding Fed exposure to higher short-term rates, he said.
Dudley said that $500 billion of purchases, for example, would add as much stimulus as reducing the Fed’s benchmark rate
0.5 percentage point to 0.75 percentage point, depending on how long investors expect the Fed to hold the assets.
“The clearer and more credible the framework governing purchases, the greater the likelihood that market participants would act in a manner that helped the Fed achieve its objectives,” Dudley said. Investor confidence in the Fed’s ability to exit “when the time is right” will make purchases more effective in stimulating the economy, he said.
Inflation Problem
Dudley said in response to questions that the ability “for us to exit on time” and without leading to a longer-term inflation problem is “critical.”
Another option is for the Fed to announce an explicit inflation goal and then, if price increases are too slow, potentially aim to overshoot the goal in future years. One risk is that investors may “mistakenly” conclude that the Fed was “tinkering with its long-run inflation objective,” undermining the change in policy.
Dudley’s comments differ from the FOMC’s Sept. 21 statement that it’s prepared to ease policy “if needed” to spur growth and achieve its mandate of stable prices and full employment.
Misaligned With Mandate
The jobless rate has been above 9 percent since the worst recession since the Great Depression ended in June 2009.
Inflation measures are “somewhat below” levels the FOMC judges consistent with its mandate, the Fed panel said in its statement last month.
Dudley declined to comment on what he’ll advocate at the next meeting or to predict its outcome. Some policy makers may not be on board: Philadelphia Fed President Charles Plosser said Sept. 29 that he doesn’t see how additional asset purchases will help employment in the near term, while Dennis Lockhart of the Atlanta Fed said Sept. 28 that he hadn’t made up his mind yet on easing policy.
Figures from the Commerce Department in Washington showed yesterday that the U.S. economy grew at a 1.7 percent annual rate in the second quarter, marking the start of the slowdown in growth that’s concerned the central bank. The world’s largest economy grew 3.7 percent in the first three months of the year and 5 percent at the end of 2009.
Economists surveyed last month projected little pickup in growth for the rest of the year as joblessness hobbles consumer spending and housing languishes around record lows.
