Fed Speakers Show Contrasting Views, Offer Differing Prescriptions

Today, several members of the Federal Open Market Committee (FOMC), the policy-setting committee of the Fed, gave speeches. From their prepared remarks, we can get a sense of their views towards economic growth – and the future direction of Fed policy. Not all members currently have a vote, as votes rotate among different Fed districts each year. Here is summary of their views, which, at times, differ markedly among Fed members:

His forecast for GDP is a bit above two percent in the first half of this year, and unemployment ending the year a bit above 7.25 percent. He notes, “While economic growth was modest in the latter part of 2012, recent data suggest some improvement in the first part of this year. On balance economic growth has been a bit better than expected, considering the notable headwinds of fiscal restraint and issues in Europe that reflect the still-fragile global recovery. The current expectation of many private-sector forecasters is that the economy will expand slightly more rapidly than its potential rate of growth in the near term. “ He argues that the costs of the Fed's policies “are outweighed by their benefits, and by the costs likely to result if we did not pursue them. However, I see little evidence that our monetary policies are generating significant financial stability problems at this time. Put simply, the benefits of our asset purchases have exceeded any reasonable estimate of the costs.” He sees each $500 billion in asset purchases reducing unemployment by one-quarter percentage point. He is in favor of continued asset purchases, saying that the data “implies that we should continue our large-scale asset purchases of Treasury and mortgage-backed securities through this year – although the amount may need to be adjusted up or down, depending on how the economic situation evolves.” One by one, he addresses, and then dismisses, each potential risk from the Fed's balance sheet expansion. He concludes, “In sum, broad-based financial stability concerns do not seem particularly acute at this time.”

Her forecast is that “the economy will grow a little more than two and a half percent this year and about three percent in 2014. With economic growth around 2-1/2 to 3 percent, I expect the unemployment rate to decline to around 7-1/2 percent this year and to around 7 percent at the end of 2014.” Unlike Rosengren, Pianalto emphasizes the risks associated with quantitative easing. While not currently a voting member of the FOMC, she comments, “[I]f the labor market data continue to be solid, and my economic outlook remains favorable, I could then see a basis for slowing the pace of asset purchases. Even at a reduced pace, the Federal Reserve would still be adding accommodation, continuing to provide meaningful support to economic growth and job creation.” She continued, “Another reason for leaning in the direction of slowing the pace of asset purchases and limiting the overall size of the program is risk management considerations.” In a mirror-opposite contrast to Rosengren, she listed one-by-one a number of risks from the Fed's asset purchases and why we might be concerned. After citing potential risks for the future, Pianalto concludes, “The economy appears to be on a steady, albeit moderate, growth path, and the potential risks associated with our large-scale asset purchases appear manageable at the moment. I would regard a slowing in the pace of asset purchases to be a welcome direction for monetary policy if it resulted from a significant improvement in the outlook for labor market conditions.”

He sees “output continuing to grow slowly—at around 2.5 percent in 2013 and around 3 percent in 2014. I expect unemployment to continue to fall only slowly, down to around 7.5 percent in late 2013 and around seven percent in late 2014. This level of unemployment will continue to constrain wage growth. Consequently, inflation pressures will remain subdued, as I expect PCE inflation to be only 1.6 percent in 2013 and 1.9 percent in 2014.” His “main conclusion is that (his) outlook implies that monetary policy is currently not accommodative enough.” He sees inflation as running less than the Fed's target, while “the unemployment rate will still be close to 7 percent by the end of 2014. The FOMC could facilitate a faster return of the unemployment rate to its lower long-run level by adopting a more accommodative monetary policy that puts more upward pressure on employment. Thus, I would say that my outlook for unemployment and my outlook for inflation both point to a need for more accommodation than is currently being provided by the FOMC.” Instead of arguing for more bond purchases, he suggested communication as one tool to increase the effectiveness of monetary policy, saying, “In its current forward guidance, the FOMC has stated that it expects the fed funds rate to remain extraordinarily low at least until the unemployment rate falls below 6.5 percent. The FOMC could provide additional needed stimulus by lowering the threshold unemployment rate from 6.5 percent to 5.5 percent—that is, by changing one number in the existing statement.” That would extend how long market participants would expect low rates to last – and that in itself would bring down yields across a longer portion of the yield curve, achieving through language what bond purchases might do. ***** The key is in what the FOMC members discussed during their most recent policy meeting March 19-20. The minutes from that meeting will be released Wednesday, April 10. It is here where we might see the internal debate within the Fed as they deliberated with each other on policy.