Just a bit of idle musing ahead of today’s release of the latest FOMC minutes. If we had to summarise the recent evolution of thinking on the FOMC, we would note three trends:
1) Qualified support for the latest round of QE2 even from some FOMC members who are skeptical that monetary policy can further boost the economy at this point.
You’ll find this in the recent speeches of Kevin Warsh and Naranya Kocherlakota. And even Jeffrey Lacker of the Richmond Fed, a committed inflation hawk, said he believed the FOMC at least understood the risks it was taking and that it was the pace of reducing unemployment (rather than the unemployment rate itself) that guided its decision.
Each put his own spin on things, but all of them emphasized that inflation remains below the Fed’s implicit target, and so there is room to use the Fed’s balance sheet to stoke it.
2) A recognition among the supporters that quantitative easing, though a useful step, is limited in what it can accomplish.
This is a point made not just by Bernanke, but also by the NY Fed’s William Dudley and vice chair Janet Yellen, who are among the most dove-ish members on the committee.
3) The FOMC members have become overtly political. This is the most visible and obvious of the three trends, and also the most startling. Bernanke himself stood before the world last week both to hit back at criticism from the surplus countries and also (though it was less noticed) to argue for additional fiscal stimulus.
This seems like a dangerous game Bernanke is playing but clearly one he feels is necessary, either out of frustration or to hit back at politicians who are now meddling in the affairs of the Fed — or, most likely, both.
We would add two quick observations to this. First, the harmony probably won’t last once (if) inflation returns, even with a labour market still in the dumps. The support for these m now mostly because the Fed isn’t satisfying either mandate, but if it later comes down to choosing between Of course, generating inflationary expectations is one of the goals of QE2, so this is to be expected.
Second, we’ll reiterate the point we made in our earlier post about the upcoming change in the FOMC’s voting membership next year. We speculated that perhaps the shift towards hawkishness would make it harder for the FOMC to do anything bold in the future. This seems especially true if the committee really is converging on a view that further monetary policy measures would only be of limited help at best, and if the political environment in which it operates becomes even more heated.
Related links:
FOMC composition and future monetary policy – FT Alphaville
The doves respond, quietly – FT Alphaville
QE or no QE, that is the question – Gavyn Davies