Ramble on FOMC

Shawshank, VA 11/2/2011 (StreetBeat) – In August the FOMC told us that they thought economic conditions were “likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.” It was a move that three members considered to be too much, but it was also a move that some others considered to be too little.

In September the FOMC said, “come on baby, let’s do the twist; take my little hand and go like this.” That is of course a paraphrase of their statement, which actually said, “The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years of less.” Once again the FOMC voted in favor a strategy that some on the Committee thought was a step to far while others at the table felt that the Fed should have taken a greater leap forward.

Having taken somewhat controversial decisions at the last two policy meetings it is unlikely they will take another one today. There has been some talk since the last meeting, specifically by vice-chair Yellen and Governor Tarullo, about doing a third round of quantitative easing through direct purchases of mortgage backed securities and it is true that this strategy was mentioned at the September FOMC meeting, but I think it is unlikely they will go down this path unless their outlook on inflation begins to make them nervous about the prospects for deflation.

It would seem that the only new twist to their policy strategy that could come today is a change in the way they communicate with the public, but even this is a long shot at this meeting, in my opinion; although it could happen sometime in the near future. A change in the communications would take the form of being explicit on what level of inflation or unemployment would inspire them to alter their outlook on the future path of the funds rate. The minutes from the September FOMC meeting noted, “Most participants indicated that they favored taking steps to increase further the transparency of monetary policy, including providing more information about the Committee’s longer-run policy objectives and about the factors that influence the Committee’s policy decisions. Participants generally agreed that a clear statement of the Committee’s longer-run policy objectives could be helpful; some noted that it would also be useful to clarify the linkage between these longer –run objectives and the Committee’s approach to setting the stance of monetary policy in the short and medium term.” There has also been some suggestion that the Fed could target GDP growth or even have the Fed Governors and regional Fed Presidents give a view on where they think the funds rate will be over a longer run timeframe, such as the three year long-run outlook that they now offer four times a year in their Summary of Economic Projections (SEP). The SEP is due out again today and it will be worthy of a quick check to see if they have altered the style or content of the this document.

Not to throw cold water on the idea of the Fed being explicit on the affect their outlook for growth would have on rates or to say that we shouldn’t pay attention to their expectation for the future path of the funds rate. But I do recall that their guess at the end of 2010 was for the 2011 GDP to come in at about double the actual rate so far achieved this year, and how useful would it have been to go all in on a Fed rate hike during the days not too long ago when the Committee was so busy chattering about their exit strategy; you remember that conversation, the one that took place in the months and quarters before the Fed said they weren’t likely to change the funds rate for the following two years.

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