Is the Election Holding Back the Fed?

Boston Federal Reserve President Eric Rosengren is stepping up his call for additional policy action at the next meeting.  Via the Boston Globe:

Eric Rosengren, the head of the Federal Reserve Bank of Boston, is issuing an unusual public plea to his colleagues in Washington, urging the nation’s central bankers to ignore election-year pressures and do more to jump-start the muddling economy.

Less than a week after Federal Reserve policy makers elected not to take new steps to stimulate the economy, Rosengren in an interview added his voice to a handful of dissenters, saying the central bank has to act at its next meeting in September to revitalize the economy. The Fed should not worry, he said, if the move is seen as influencing the presidential election.

“We don’t get to pick the timing of a global slowdown,” Rosengren said. “If there’s a slowdown and you have an independent central bank, the appropriate response is to act. I think that’s exactly what we should do.”

I have to admit that I was caught off-guard by the direct reference to the presidential election.  I have seen speculation that the Fed is avoiding action until after the election, and this seems almost like an admission of such hesitation.  Is this comment directed at the public, or at his colleagues?  My response:

Some Fed specialists said the remarks from Rosengren are unusually pointed in a world where even the simplest statements are carefully worded. Tim Duy, an economics professor at the University of Oregon who writes a column called Fedwatch on the website Economist’s View, said he was struck, in particular, by Rosengren’s publicly urging the central bank to ignore the political situation.

“That would be fine to say internally. But to say that externally, to pull back the curtain and say, ‘They’re doing this for the election,’ I think is a shift and reflects his level of frustration,” Duy said.

Rosengren then goes further and calls for very aggressive policy:

Rosengren said the economy is just “treading water” and among the actions the Fed committee should consider is a repeat of what the central bank did during the recession when it spent trillions of dollars buying securities. The bond-buying program was controversial, and critics complained it did not help much. But Rosengren said anything more modest than that would probably not be enough. “It would be hard to come up with a program with a big enough impact” without big purchases of securities, he said….

…“Facing a world that’s going to be treading water, monetary policy shouldn’t just stand there and watch it happen,” Rosengren said. “We should start talking about more aggressive policy to make sure we get the kind of growth that’s consistent with improvement in the labor markets.”

Rosengren has been moving in this direction for a few months, but these sound like very pointed remarks, the remarks of someone who is very frustrated with the current stance of policy.  Interestingly, such level of frustration could also be indicative of the strength of opposition to additional quantitative easing within the FOMC.  Indeed, I have long-hypothesized that Federal Reserve Chairman Ben Bernanke could move the middle ground of the FOMC to the doves if he desired, and the fact that he hasn’t done so reveals his preference for inaction.  Consequently, the bar to further easing has been higher than believed. That continued inaction in the face of ongoing lackluster economic growth and the persistent failure to meet not just one but both parts of the dual mandate could finally be trying the patience of the FOMC doves.

Bottom Line:  Who is Rosengren talking to here?  It doesn’t sound like he is making a case to the public when he says “[w]e should start talking about more aggressive policy.”  It sounds like he is making a case to the rest of the FOMC.  Same with his comments on the election.  At a minimum, he is another voice for aggressive easing.  But such comments sound like he is frustrated with the path of policy, which would signal the strength of the resistance to further easing.  Overcoming that resistance is critical to clearing the path to that easing.

Now we await Bernanke’s comments, to see if he gives any ground.

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