Posted on 01/26/2009 7:09:49 PM PST by sickoflibs
The Federal Reserve is struggling to explain its plans for pulling the U.S. economy out of recession as it resorts to unorthodox policy tools while official interest rates are set near zero.
Since a rate-setting meeting in December, several U.S. central bank officials have tried to lay out what the Fed can do now that it has run out of conventional ammunition to support economic growth.
Usually, the Fed can focus its policy message around its interest rate target, but with federal funds already close to zero that capability has disappeared with no clearly discernible substitute on the horizon.
"It is very difficult to communicate the nature and effects of unconventional balance sheet actions," Glenn Rudebusch, associate director of research at the San Francisco Federal Reserve Bank said in a report earlier this month.
Rudebusch suggested the Fed needs to explain what it hopes to achieve with its various new programs to ease conditions in specific credit markets.
The Fed's next chance will come on Wednesday, when its policy-making Federal Open Market Committee issues a statement following two days of deliberations. It will be the FOMC's first meeting since it cut the overnight federal funds rate to a range of zero to 0.25 percent in mid-December.
Some Fed watchers expect a commitment to buying long-term Treasuries, word on an expansion of the efforts to buy securities in other asset classes, or even setting of an explicit inflation target as as a way to tackle worries about deflation.
Still, the reactive nature of many of the Fed's moves since 2007, with programs seemingly created on the fly as fresh crises erupted, has made crafting a clear policy message more difficult, and also devalued the currency of the FOMC statement.
"The Fed has been making up plays at the line of scrimmage, rather than taking them from a playbook," said Brian Fabbri, economist at BNP Paribas in New York. "Thus the relevance and drama of the FOMC meetings—where the markets would anticipate and react to each change in the Fed's target rate—has been reduced."
Helicopter Days
The Fed is now providing huge amounts of liquidity and credit to various segments of the private sector, massively expanding the size of its balance sheet in what Chairman Ben Bernanke terms "credit easing" policy.
It has attempted to distance itself from Japanese-style "quantitative easing," when the Bank of Japan in the early 1990s set an explicit numerical target for reserves, and expanded reserves accordingly.
"The Japanese experience suggests that simply expanding bank reserves—even by a very large amount—had little effect on bank lending or on the economy more broadly," Janet Yellen, San Francisco Fed President and an FOMC voter this year, said on Jan 15.
Still, the Fed risks a communications gap because its "alphabet soup" of programs can not be be distilled into a simple message on its policy bias—easier, tighter, or no change—or easily measured for signs of success.
Chicago Fed President Charles Evans has defined the Fed's current actions as a proxy for doing the impossible, or setting the fed funds rate at a negative level.
"The trick, no doubt, would be to print exactly the right amount of money to fix today's economic problems without generating another disaster via hyper-inflation," said Rory Robertson, interest rate strategist at Macquarie Bank in Sydney.
But fine-tuning policy around a theoretical negative funds rate is tough, as then-Fed governor Bernanke acknowledged in a now-famous 2002 speech on deflation.
"Alternative policy tools ... may raise practical problems of implementation and of calibration of their likely economic effects," Bernanke said.
Bets in the derivatives markets suggest the Fed could start lifting interest rates as soon as September. Many forecasters look for a much longer spell of near-zero rates, given their gloomy economic outlook.
Jan Hatzius, economist at Goldman Sachs, said that by the end of 2010 conventional monetary policy drivers such as the Taylor Rule, which suggests appropriate adjustments to interest rates based on factors such as inflation and the jobless rate, would imply a fed funds rate of negative 6 percent.
"Our forecast of a 9.5 percent unemployment rate by late 2010 implies the largest amount of slack of the postwar period," Hatzius said. "Fed (and Treasury) officials will need to expand their efforts to stimulate demand dramatically further."
I’m speaking metaphorically. It’s an analogy. Perhaps you’ve heard of them.
Use small words, he's slow.
The Fed doesn't need to physically print bills, regardless of denomination. Remember, they have legal authority over many areas of monetary policy, including increasing the money supply via these types of inter-bank transactions. The old way was to print money and hand it out; now they just make an electronic entry.
I'm not sure whether Mr Todd is in favor of this type of central banking power, since he seemed to rather enjoy tweaking your lack of knowledge in this area rather than debate the question of "is it good and/or right"?
Travis, the issuance of new Treasury/agency bonds increases the level of interest bearing federal debt. This is the fiscal (Keynesian) side of economic policy ie the "No Pork Left Behind" bill currently before Congress.
The Fed is charged with managing monetary policy via interest rates & money supply. The primary complaint with them is that an entire world economy is dependent on Bernanke & Co getting it just right between inflation & depression.
The secondary, more paranoid issue, is that the Fed and various broker/dealers and other financial institutions are engaged in self-dealing. For example, charges that Paulson engineered TARP I to help out his buddies and enrich himself.
The third complaint is that Bernanke is really pushing the Constitutional envelope in terms of what his powers are with regard to the 1913 Act. Right now, it seems like the politicians are simply clueless and are hoping he has all the answers.
All your self-described bad ideas are rooted in one bad idea which is not allowing the market to determine a reasonable amount of lending. Slowing down the massive deleveraging can be done without trying to pump new loans - it just requires traditional Fed loans with somewhat longer terms. The market is going to have to be allowed to properly price loans, the longer that is postponed, the worse the inevitable contraction (or hyperinflation) will be.
Wow... Just...
Wow...
Here’s the problem... Just creating more FRN’s does nothing to help the economy. All it does is devalue the means of exchange making things worse. Zimbabwe prints money by the mega-ton and it’s worth less once the ink is dry than when it was still blank paper.
The Fed creates money by bookkeeping entry.
When there is a sudden jump in demand for dollars, the Fed helps the economy by being the lender of last resort.
Be careful. They have torches and pitchforks and know where the smart people live. LOL!
The gold standard will be restored
People create wealth by making and selling things. The means of monetary exchange is moderated by the Fed. The Fed “makes” nothing. It does however devalue the our legal tender by just “printing” more bills backed by nothing.
Unless you like paying $140 for a loaf of bread? We could get that bad if they keep doing this.
The Fed doubled its balance sheet since last summer. Did prices double? What did oil and gas do when the Fed "printed" all this new money?
How is "lending" money considered "inflation"?
Hey... looky there! Inflation grew. Nice going Ace...
Lending money based on nothing doesn’t inflate? Wow... You need to re-write the text books.
That's inflation?
I just lent my brother $20. How much inflation did I cause?
No... that’s the price of a barrel of oil and a straw man. Focus... Take your Ritalin and try again.
Now head over to your printer, make 3 copies of that same $20. That's inflation.
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