There’s no need to read the minutes of the last FOMC meeting when they are published next week. The WSJ’s Jon Hilsenrath has saved everyone the trouble with an extremely detailed piece on the August 11 gathering.
It describes at some length the divisions and views of the 17 member committee and how they arrived at the decision to stop the Fed’s $2,000bn stock of mortgage debt and Treasury holdings from shrinking any further.
(Apparently 7 of the 17 spoke against the move but the debate was put to bed by Bernanke who decided to push on regardless).
But that’s not all. Hilsenrath even tells us who Ben Bernanke takes to Washington Nationals baseball games and what the Fed’s massive oval boardroom table is made of – Honduran mahogany and granite if you are interested.
From the WSJ:
Officials were clustered in two camps. In one camp, Mr. Dudley, and the presidents of the Boston and San Francisco Fed banks, Eric Rosengren and Janet Yellen, were distressed that the Fed was far from its objectives of low unemployment and stable inflation. Unemployment was at 9.5%, above the 5% to 6% range that the Fed considers full employment. Inflation was running at around 1%, below the Fed’s informal target of 1.5% to 2%. This camp was more inclined to act.
The other camp was skeptical. Fed governor Kevin Warsh, a former Wall Street investment banker who worked closely with Mr. Bernanke during the crisis and who attends many Washington Nationals baseball games with the chairman, worried that a decision to reinvest mortgage proceeds into Treasurys would confuse investors and lead many to believe the Fed was paving the way to resume major purchases before it had decided to do so. An abrupt change in stance, he argued, could lead the public to believe the Fed was more worried about the economy than it really was.
Some officials wanted the Fed to acknowledge the softer economy in its policy statement but hold off on changing the management of the portfolio until there was more clarity on the economy.
Fascinating stuff. However, we can’t help wondering why this article has appeared now and who has been talking out of school. Was it the Fed chairman himself? Or one of the regional chiefs?
Perhaps the following paragraph provides a clue:
Before the meeting, officials at the Federal Reserve Bank of New York, which manages the Fed’s portfolio, had grown concerned, according to people familiar with the matter. The Fed’s portfolio of mortgage-backed securities was about to begin shrinking much more rapidly than anticipated, as low mortgage rates led more Americans to refinance their mortgages. That in turn meant the mortgage-backed securities held by the Fed were being paid off.
“People familiar with the matter” is of course clunky journalese for “a press officer told me, off-the-record…” Yet William O’Donnell at RBS speculates on a higher source and reckons this is an attempt to put Bernanke’s forthcoming Jackson Hole speech on Friday into some perspective.
The article appears to come directly from a Fed source (Bernanke himself, I’d presume) and I reckon that it’s an attempt by the Fed to help to put Bernanke’s Jackson Hole speech this Friday into a broader context as his speech comes 1) before the Minutes are released and 2) without Q&A. As my partner John Briggs said this morning, it allows Bernanke to focus only on policy this Friday– rather than the debate itself.
Given recent Fed flip-flopping, that may well be needed. Indeed, it worth recalling the breathtaking speed with which the US central bank has gone from waxing confidently about a sustained growth path to fretting about an economy struggling to achieve orbital velocity, says O’Donnell.
The Fed went from indirectly floating the QE2 trial balloon (Fed Minutes published July 14th) to Bernanke’s “Humphrey-Hawkins” testimony (July 21st) that dwelled more on Exit rather than Re-Entry strategies to the decidedly downbeat August 10th FOMC Statement announcing principal reinvestment(s) to keep the size of Fed security holdings constant.
The rushed way the Fed announced the proceeds reinvestment plan on the 10th (somewhat confusing signals of what constituted a “long term” security) smacked of a rush job on this new scheme as we discussed in recent comments. This recent episode reminds me of the Fed “fumble” on December 11th, 2007 when they took no action to cut the Discount Rate (market was begging for it-to help with year-end) only to announce the next day the creation of the Term Auction Facility (TAF). But economic conditions were much more fluid back then than they appear to be now. So, I keep coming back to “why now?”
That’s a very good question and one O’Donnell attempts to answer.
I am left with the same questions that you probably are: Tight credit, lower housing wealth, high unemployment, modest income growth and weak nonresidential real estate investment did not sneak up on anybody, so why now? Could the Fed also now be feeling the same political pressure that the BOJ may have felt through their Rinban operations, I wonder? Could it be that some on the Fed has such a morbid fear of deflation that they’re squirming in seats (Hilsenrath’ article suggests this)? Also, what impact will proceeds reinvestment have on the broader economy over the short and long term? Are the potential rewards worth the “risk?” Further, did this whole decision simply illuminate and widen the divisions within the FOMC?
We await feedback from the Jackson Hole gathering with interest.
Meanwhile, Paul Krugman reckons the divisions at the Fed are a cause for concern.
Related links:
US economy is slowing more than the Fed has recognised – Gavyn Davies