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."
Yep—just make sure it’s not just in one bank. I do have some gold/silver coins (small amount) as a hedge to runaway print inflation with new, larger denominated bills. I really don’t think they’ll even attempt that route as it would mean the gov’t bond would likely soar to 20-25% interest (at least) which would crush the rest of the economy that revolves on debt (corporate, commercial real estate, student loans, mortgages, etc).
How many of you know that the Fed now has on its books ~33& crap securities that it got from crap firms (banks& Wall St) and gave them (swapped) Treasuries?
Until this episode the Fed only has US Treasuries in its holdings
How many of you know that the Fed now has on its books ~33% crap securities that it got from crap firms (banks& Wall St) and gave them (swapped) Treasuries?
Until this episode the Fed only has US Treasuries in its holdings
I go along with the deflation scenario.
Deflation only just got here and has a few years to play out, to run its course after 25 years of inflation ever since Paul Volker eased up on his clampdown which back then was called disinflation. But was a Fed imposed deflation to reign in the Jimmy Carter inflationary episode
Martin Weiss has lots of good rationales for being in the deflation camp. Mish and Roubini are also deflationists
But right now there is an inflation blip with gold, natural resources stocks and crude up and the USD down
Last but not least, the deflation in credit has not translated into broader deflation. There are few price drops other than energy that was way overpriced and has now undershot.
What about if Asian investors see the fed buying long term treasuries with printed money to create inflation, as this article says, and start selling treasuries and dollars?
Democrats are proposing, even the stimulus plan, many structural inflationary measures on top of the fed printing money and huge deficits. These will make it harder to deflate in the next crash. Just like health care prices cannot deflate now. Or even many food prices, all government controlled.
Anyone who bought oil in 2007-2008 was taking a high risk. I heard predictions of even greater gains but ignored them. fast run ups scare me. But at these lows oil, grain, rice, all those commodities are pretty much guaranteed to make big money in a few years.
It's time for the People to reassert their authority. Four years is a long time to wait, and that may turn out to be impractical.
It's rather simple, really - the Fed is now trying to push a rope.
RE :”Did you notice the unemployment rate went up immediately after minimum wage was raised and unemployment benefits were extended? “
That should be obvious. If also keeps deflation from correcting the market and making america more efficient. A drop in prices including labor could be very good long term. Democrats always moan about high prices , but want them to increas windfall taxes and incomes taxes.
Watch the dems on this plan. At the same time they say it has to pass immediately because of job losses, they are defending it admitting, it doesnt really create jobs, that it is a New Deal giving relief to those in distress. But it’s not called the ‘relief’ bill. Dems want a bad economy as long as they can get away with passing the blame. In fact what if they can have a forever bad economy with a majority voting block on the gov payroll, and unions?
Instead of trying to create demand AND stop deflation at same time, how about letting deflation take it’s course, and letting the lower prices and costs be the stimulus? This would include the government cutting spending, I know, not happening, ever.
Remember when dems acted upset over high gas prices? now they are doing everything to raise them again.
The Fed could buy high yielding corporates. They could buy GNMAs. They could buy CDOs. They could buy real estate. They can buy anything, not just Treasury securities.
The maxim about generals fighting the last war applies here - with a twist. The Fed and governments around the world are doing what the 'experts' said should have been done at the onset of the Great Depression - with the assumption that such would have actually prevented or at least alleviated such. But they are failing to both examine the structural differences between then and now, and are not critically examining the inherent contradiction that you pointed out. The end results will in turn be contradictory as a result - TARP recipeint banks reducing lending is just the most recent example.
You notice that? That is Schiff’s claim that it is and creates inflationary bubbles by printing money/super low savings interest rates to stimulate the economy. Even at the peak of the bubble savings account rates were 2-3% but ING could get 5%. Now it is zero, of course people are saving right now so you don't need high interest rates
And if all I heard was from them I would believe it too. But the other theory is that it was asset bubbles caused by both low interest rates and federal stimulus (2002 case) , that caused the depression, and that the new deal actually lengthened the depression, by not letting the market correct prices. But Roosevelt evoked feelings of children to a parents that promises to make things better. He was my grandmothers hero. If you got a government job in the great depression you felt saved. Maybe he was the parent in the A+E Show Intervention that gives the addict child money, but gets it from the good child's credit card.
I can tell you for sure that those in Washington, especially democrats believe in the fixed pie theory and that they need to carve it up. That is a recipe for 1970s stagflation.
Here we go. The personal attacks and minimization begins. Destroy EVERY messenger. NEVER let the opponent's message out and if it gets out, destroy the messenger and discredit the message.
Touche'... troll!
Use them for what?
What benefit in this name calling? Be articulate yourself. Get published. Be on TV. Spread the message. At least he's out there!
And how does this solve the debt funding problem? The Fed buying existing obligations (to bail out Wall Street scum) will put no new money into the system.
“Barack Obama is no smarter than Khrushchev or Mao...”
Come on!!You know Barry went to HARVARD!!!!
How would the Fed pay for the existing obligations?
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