Tuesday, January 29, 2013

FOMC Report January 29-30, 2013












 FOMC Report
January 29-30, 2013
Martin B. McGuire


You’ve heard of the fellow who is found staring intently at a blank wall in an art gallery until being advised the new exhibit is in the adjoining room.  To look for a lot of color from the forthcoming FOMC meeting may leave the same patron wanting, at least in the short-run.  The best of this meeting is likely to be found in the release of the Minutes on February 20 rather than in the post meeting statement.  In those minutes we might gain a better understanding for how the new mix of voting/non-voting members will interact.  There are strong differences in opinion about the efficacy of the current open-ended LSAP program and when this program might be curtailed.     
  
The most recent Beige Book (January 16, 2013) left an impression that the staff had need of rest following a hard run. Little new information was shared that would shape a decidedly different picture for forthcoming policy change.  The staff noted more aggressive competition for highly qualified borrowers in several districts and an incremental loosening of credit standards in the Atlanta region as indicating a greater risk tolerance. Conversely, manufacturing activity was described as mixed and the term ‘modest’ was used along with that of ‘moderate’ in characterizing overall economic activity within the twelve districts.    
Clearly the staff and the committee worked hard to bring forward into 2012 the rather dramatic changes in policy enacted; specifically, the addition of open-ended outright Treasury purchases and threshold guidance.  Consensus expectation (gratefully not mine) was for those changes, if they were to come at all, to be further entertained at this January 2013 meeting.  We might then understand that these public servants are largely ready to step back and review their efforts to date rather than charge ahead with additional policy initiative. 

The Post-Meeting Statement:
While the term ‘modest’ was used in the Beige Book, I expect the statement will continue to reference economic activity and employment as having expanded at a moderate pace since the FOMC met in December.  We should not expect any changes announced in the amount of agency mortgage-backed or longer-term Treasury securities purchased regularly.  There will likely be some changes to these amounts prior to truncation of this program, but we should not see mention in this statement.  
The December statement did a good job of conditioning readers that the Committee would rely on a wide swath of data ‘in determining how long to maintain a highly accommodative stance of monetary policy’ and the Fed shouldn’t feel compelled to adjust these descriptions. 

I did however find one change from the October statement that was interesting if largely ignored by others.  The October statement read; ‘To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.’

The December statement added (the italicized); ‘To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.’

To have said ‘…after the asset purchase program ends and ‘after’ the economic recovery strengthens would have made Fed intentions more clear.  Otherwise one might see the Fed inclined to expect requisite repair of the economy as consistent with the end of asset purchase program and thus more willing to lift policy rates sooner following an end to asset purchases.  Expect at some point a rephrasing of these conditional states for clarity.      


Statement of Longer-Run goals and Monetary Policy Strategy:

It appears that the statement from last January need not be revised even though the Fed has since implemented threshold guidance which highlights a level of unemployment (above 6.5%) that is consistent with a prescription for an extreme accommodative policy stance.  Some might argue that highlighting unemployment as it does in threshold guidance is consistent or could be confused with ‘setting a goal for employment’ which is something the ‘Statement of Longer-Run goals and Monetary Policy Strategy’ said would be inappropriate; ‘The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision.’

While I suspect it won’t be the case, there may be Committee members who feel further clarification is in order to prohibit any unwanted interpretation that the Fed is setting a goal for employment. 

Driving With a Foot on Each Peddle:

Back in March, 2009 I suggested that the Fed was correct in bringing forth a public discussion and detailing a framework by which accommodative policy would be removed. (*) The main argument I made at that time for this discourse was that a heightened level of uncertainty surrounding economic and financial market prospects was itself dampening economic activity. Economic growth might be supported by a discussion of policy variables well within the Fed’s control, even though no such policy measures were to be immediately attended.  This would reduce the overall level of uncertainty outstanding.
Interestingly, the Fed did engage in extensive exit strategy discussions and implemented guidelines for conduct.  Finally, these exit strategy discussions coincided smartly with a massive recovery in equities and other risk assets.     

Today however it is clear a cycle exists where successive additional levels of accommodation provided are followed quickly by a return to discussion of when it will be appropriate to remove accommodation.  Any support provided economic and financial conditions from the discussion of an exit strategy as a counterweight to heightened levels of uncertainty has already been largely used up.  At this juncture, it is likely best to allow economic variables to speak loudest as to the timing of exit strategy implementation. 

 

(*)FOMC Report, March 17-18, 2009; ‘Introduction to Fed Exit Strategy’
Summary:
The benefit from articulating the exit strategy from excessively easy monetary policy is greatest at this present juncture.  However, an exit strategy from the current monetary policy directive is well off the radar for most, both inside and outside of the Fed.  For the benefit from discussions about an exit strategy to be most fully realized, it is best that Fed officials decide together to communicate this eventual policy shift as soon as possible for several reasons.
The economy, financial system and credit markets will benefit from a well engineered and articulated exit strategy in three ways.  First, an exit strategy expressed appropriately and immediately will increase ‘visibility’ and provide a measure of traction for the currently higher levels of liquidity.  Secondly, a level of respect can be afforded the Fed for its willingness to be ‘forward looking’.  Finally, there is the basic premise which holds that we would only openly discuss an exit strategy if it were somewhat timely.
Adding Visibility Reduces Uncertainty:
Efforts should be made to engineer and disseminate, in a most immediate fashion, an intent and initial action step(s) in removing excessive accommodation.  To do so will, at a most critical time, help to remove some level of uncertainty.  Mr. Hoenig touched on this briefly in an enlightening piece of reporting work by Steve Beckner only a week ago.  I am not sure Mr. Hoenig shares my level of conviction in the benefit likely derived from this most appropriate form of Fed transparency.
Fed transparency is best administered during easy or accommodative policy initiatives.  Where Fed transparency lends itself to increased visibility, it also is accountable for additional traction necessary for higher levels of liquidity to promote economic growth.  The main reasons for the Fed to afford the economy a greater level of liquid is because heightened levels of uncertainty have prompted reduced spending and investment. Visibility, whether as a consequence of Fed transparency or otherwise, serves to reduce uncertainty.  Transparency really serves only one of the Fed’s mandates and that is toward promoting full employment. 
It could be argued that the level of visibility afforded open discussion of so far off an action step is minimal and thus of questionable benefit.  However, I would suggest that in the darkest tunnel even the faint light offered by a struck match is wanted illumination…

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