Much Fedspeak this week, expressing a wide variety of views. I need a scorecard to keep track, and I probably still missed one or two:
New York Federal Reserve President William Dudley
Event: Speech, interview
Taper?: Sets a high bar for taper, seeing insufficient evidence that the recovery is either sufficient or sustainable.
Notable quote: “Although the neutral rate should gradually normalize over the long-run as economic fundamentals continue to improve and headwinds abate, this process will likely take many years. In the meantime, the federal funds rate level consistent with the Committee’s objectives of maximum sustainable employment in the context of price stability will likely be well below the long-run level.”
St. Louis Federal Reserve President James Bullard
Taper?: September was a close call, October possible
Notable quote: “We said it was data dependent,” Bullard told reporters after a speech in New York. “It turned out it was data dependent. It enhanced our credibility in the sense that it showed we really are paying attention to the data.”
Federal Reserve Governor Jeremy Stein
Taper?: September close, but he supported holding back. Likely would not oppose taper.
Notable Quote: “…my personal preference would be to make future step-downs a completely deterministic function of a labor market indicator, such as the unemployment rate or cumulative payroll growth over some period. For example, one could cut monthly purchases by a set amount for each further 10 basis point decline in the unemployment rate.”
Minneapolis Federal Reserve President Narayana Kocherlakota
Taper?: Believes the Fed should do more, not necessarily more QE.
Notable Quote: “Doing whatever it takes in the next few years will mean something different. It will mean that the FOMC is willing to continue to use the unconventional monetary policy tools that it has employed in the past few years. Indeed, it will mean that the FOMC is willing to use any of its congressionally authorized tools to achieve the goal of higher employment, no matter how unconventional those tools might be.” Shades of Draghi, no?
Dallas Federal Reserve President Richard Fisher
Taper?: Hell, yes, that’s how we do it in Texas.
Notable Quote: “Here is a direct quote from the summation of my intervention at the table during the policy “go round” when Chairman [Ben] Bernanke called on me to speak on whether or not to taper: “Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question.” I believe that is exactly what has occurred, though I take no pleasure in saying so.”
Kansas City Federal Reserve President Esther George
Taper?: If you need to ask, you aren’t paying attention.
Notable Quote: “Delaying action not only allows potential costs to grow, it also has the potential to threaten the credibility and the predictability of future monetary policy actions. Policy moves that surprise the market often result in additional volatility. And by deciding that it needs to await further data, the Committee is suggesting its desire to be “data dependent” involves putting more emphasis on the most recent data points, which can be volatile and subject to revision,rather than on its own medium-term view of the economy.”
Chicago Federal Reserve President Charles Evans
Event: Speech (FYI: Great slides!)
Taper?: Close call, could still be this year.
Notable Quote: The Fed’s current monetary policy “admits the possibility of overshooting our inflation objectives,” Evans said…”We could even do this as long as inflation was below 3 pct because I think symmetry around the inflation target is incredibly important,” he added.
Richmond Federal Reserve President Jeffery Lacker
Taper?: Yes, never a supporter in the first place.
Notable Quote: “Yielding to the temptation to implicitly renege by reworking decision criteria or citing unforeseen economic developments may have short-term appeal, but widely perceived discrepancies between actual and foreshadowed behavior will inevitably erode the faith people place in future central bank statements.”
Atlanta Federal Reserve President Dennis Lockhart
Event: Speech (Topic is productivity, indirect reference to monetary policy), interview
Taper?: Close call in September, probably not October, but Lockhart will fall in line with whatever is the FOMC concensus.
Notable Quote: “In the short time between now and the October meeting, I don’t think there will be an accumulation of enough evidence to dramatically change the picture” about where the economy now stands, Mr. Lockhart said.
Bottom Line: Is that clear yet? My attempt to summarize:
- There is broad support/willingness to start the tapering process as soon as the data allows. In general, even the doves believe that it is the stock, not flow, that matters, and at this point a small taper will have little impact on the stock. Earliest timing is December. If the government shuts down, they might not even have an employment report for the October meeting. That’s going to open up a whole Friday on everyone’s calendar.
- Financial stability would add to the case for tapering. The Fed does not want tapering to be a signal about interest rate policy. If they believe taper talk has only raised the term premium, but is not affecting the expected path of policy, they will be more likely to taper. Read the Stein speech.
- You see constant reminders that tapering is not tightening, and that more accommodation could be provided via forward guidance. This is the direction the Fed wants to go.
- There is some push to include an even looser inflation threshold than the current 2.5%. I think this is limited to Kocherlakota and Evans. Maybe Yellen, but we will need to wait until her confirmation before we here from her again.
- I think we will see more effort to convince us that the commitment to a long-term low-rate environment is credible. I think this is difficult if they continue to place numeric objectives such as the 6.5% unemployment threshold that suggest the Fed will behave responsibly with respect to their inflation target. In short, the Fed is trying hard to balance stable long-term inflation expectations against the possibility of irresponsible policy in the short-run. This is a difficult message to communicate.