Federal Reserve leaders Bernanke, Evans and Williams speak out on the Fed’s efforts going forward.
Ever since the release of the minutes from the December 11-12 meeting of the Federal Reserve’s Federal Open Market Committee on January 3, there has been quite a bit of anxiety concerning the question of how long the Fed will continue with its latest quantitative easing program (QE 4). There have been many discussions about the consequences to the stock market if the Fed “takes away the punchbowl” by tightening the money supply.
While speaking at the University of Michigan on Monday, Federal Reserve Chairman Ben Bernanke spoke in more general terms than did Fed Presidents Charlie Evans and John Williams. Bernanke’s presentation included an extensive question-and-answer session which had the potential for more specifics about the fate of quantitative easing, although those opportunities were never exploited. Bernanke stuck with the general theme that the Fed’s “non-standard policies” are constantly subject to a cost/benefit analysis. He remarked that the current low inflation rate justifies the use of aggressive monetary policy. As for the criteria for ending quantitative easing, Bernanke emphasized that a system based on dates is not as transparent as a system based on achieving particular thresholds. This “Mission Possible” for these Banks?
The giant UFO in the room appeared when someone raised a question about the use of a trillion-dollar platinum coin to avoid the debt ceiling crisis. Bernanke’s initial response was: “I’m not going to give that any oxygen.” He later insisted that is the responsibility of Congress to “do what it is supposed to do”. Legal and policy issues would prohibit use of “The Coin”. He noted that no other countries have a debt ceiling and that the debt ceiling approach is not necessary to balance the budget. Watch for More Unusual Rumors this Week
Bernanke spent a good deal of time railing against the “Audit the Fed” law. He focused on the theme that the Government Accountability Office “cannot audit a monetary policy decision.” He added that the Fed audit is the first step toward reducing Fed independence.
Those in search of more specific information about the criteria for ending the quantitative easing program were better served by the presentations from Chicago Federal Reserve President Charles Evans and Monday’s presentation by San Francisco Fed President John Williams.
The speech given by Chicago Fed President Charles Evans in Hong Kong on Monday focused more on the issue of why the Fed had undertaken “nontraditional means of providing additional monetary policy accommodation” to deal with the economic crisis. With respect to the conclusion of its efforts, Evans said this:
And just last month, we changed from using a calendar date to indicating that the federal funds rate is anticipated to remain at its current levels at least as long as the unemployment rate remains above 6-½ percent, inflation in the medium term is projected to be no more than 2-½ percent and longer-term inflation expectations remain well anchored. We also noted that when the FOMC does begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and 2 percent inflation.
San Francisco Fed President John Williams provided the most specific information about the future of the Fed’s accommodative monetary policy. His outlook for the economy can be compared with the 6.5 percent unemployment rate target to reach the conclusion that quantitative easing will likely continue through the end of 2014:
When final numbers come in, I expect growth in real gross domestic product—the nation’s total output of goods and services—to register about 1¾ percent in 2012. My forecast calls for GDP growth to rise to about 2½ percent this year and a little under 3½ percent in 2014. That pace is sufficient to bring the unemployment rate down gradually over the next few years. Specifically, I anticipate that the unemployment rate will stay at or above 7 percent at least through the end of 2014. And I expect inflation to remain somewhat below the Fed’s 2 percent target for the next few years as labor costs and import prices remain subdued. My forecast takes into account both the fiscal cliff agreement and the various stimulus measures the Fed has put in place.
With respect to the measures being taken by the Fed now and in the future, Williams provided this explanation:
Critically, we indicated that we will continue these purchases until the outlook for the job market improves substantially, in the context of stable prices. In other words, instead of setting an expiration date for these purchases as we have in the past, we’ll be looking for convincing signs of ongoing improvement in the labor market and a range of other economic indicators before we stop this program. I anticipate that continued purchases of mortgage-backed securities and longer-term Treasury securities will be needed well into the second half of 2013. Of course, my forecast for the economy may be wrong, and we’ll adjust our plans as appropriate. Moreover, we’ll watch the effects of these programs closely to make sure the benefits to the economy exceed the costs.
The major ETFs expected to respond to the presentations by Federal Reserve chiefs Bernanke, Evans and Williams are:
Industrial Select Sector SPDR Fund ETF (NYSEARCA:XLI) +0.38%
Financial Select Sector SPDR Fund ETF (NYSEARCA:XLF) -0.29%
Consumer Staples Select Sector SPDR Fund ETF (NYSEARCA:XLP) +0.31%
Consumer Descretionary Select Sector SPDR Fund ETF (NYSEARCA:XLY) +0.25%
Bottom line: The Federal Reserve’s new threshold-based system for determining when to end quantitative easing could result in the continuation of QE 4 through the end of 2014, based on the economic forecast from San Francisco Federal Reserve President John Williams.