Federal Reserve Chairman Ben S. Bernanke is getting ready to move out so he is setting up his legacy. As the New York Times Binyamin Applebaum reported on a speech to the National Economics Club: “Mr. Bernanke, in a speech with valedictory overtones as he prepares to step down, described the Fed’s efforts to revive the economy since 2008 as coherent, consistent and successful. And he emphasized once again that even as the Fed begins to retreat, it would maintain the bulk of the campaign for years to come.”
In his speech, Bernanke gave some forward guidance: ““Crossing one of the thresholds will not automatically give rise to an increase in the federal funds rate target. Instead, it will signal only that it is appropriate for the committee to begin considering whether an increase in the target is warranted.” Applebaum added: “Some Fed officials support a lower threshold, an option that Mr. Bernanke did not address.”
Forbes Editor-in-Chief Steve Forbes recently wrote that “central bankers like Ben Bernanke and his putative successor, Janet Yellen, claim we need more inflation, preferably an annual rate of 2% to 2.5%. That level would cost a family making $40,000 annually an extra $800 to $1,000 a year in higher prices. If you ever run across a central banker or an economist who shares this weird view, ask that person which elected body gave the Fed–or any other central bank–the authority to impose such a tax. In the early part of the last decade the Federal Reserve and the U.S. Treasury Department instituted a weak-dollar policy, which led to the housing bubble, the boom in commodities, the inflation in farmland prices, hothouse growth in the financial sector and a bubble in bonds–and, perhaps, stocks. But just as many doctors in the mid-19th century fiercely resisted Lister’s germ theory by refusing to wash their hands before surgeries, these policymakers remain wedded to their malignant theories.”
Echoing a thesis long made by Lewis E. Lehrman, Forbes wrote: “Money is a measure of value, just as inches and minutes are measures of length and time. Money facilitates transactions – buying and selling – between willing parties. It’s claim on products and services, and its infinitely less cumbersome than barter. Changing the intrinsic value of money no more leads to sustainable growth than would changing the number of minutes in an hour or how many inches constitute a foot.”
Sustaining the value of money is the real purpose of the Federal Reserve – a legacy that is far too often ignored. As Phil Gramm and Thomas R. Saving recently wrote in the Wall Street Journal of the Fed’s recent quantitative easing: “Never in our history has so much money been spent to produce so little good, and the full bill for this failed policy has yet to arrive. No such explosion of debt has ever escaped a day of reckoning and no such monetary surge has ever had a happy ending.”
Markets do not like uncertainty. But gridlock in one area can lead to fluidity in others – as we have learned in the aftermath of the Fed’s September decision to keep the spigots open on quantitative easing. The Wall Street Journal’s Jon Hilsenrath wrote: “Federal Reserve officials created new uncertainty about how much farther they will push their easy-money policies—and new questions about how effective they are at communicating their thinking—with the decision to stand pat on the pace of their bond purchases for now.
The Fed on Wednesday went beyond merely deciding to keep buying the $85 billion a month of mortgage-backed securities and U.S. Treasurys that it had been telegraphing for months it might start winding down. In the news conference after a two-day policy meeting, Fed Chairman Ben Bernanke also seemed to walk away from some of the guidance he had given in June on how the bond-buying program would play out over the next year, making it even less clear when the program will end.
The New York Times’ Nathaniel Popper wrote that “even pushing the next steps out just a few months adds a good dose of uncertainty to the process. Some strategists said that if Mr. Bernanke steps down as Fed chairman at the end of the year, as is widely expected, his successor could have more room to reconsider any slowdown in stimulus.
Moreover, some believe that Mr. Bernanke would be hesitant to make such a big change in policy just a month before leaving the job.
“Frankly, it’s set off an awful lot of questions about what’s going on, who’s in charge and what’s happening,” said Robert F. Baur, the chief global economist at Principal Global Investors. “I’m not sure the market really knows what to think.”
Amity Shlaes wrote in Forbes that “Bernanke has made a career of postponing monetary tightening. Of the likely candidates to succeed him Janet Yellen is a relative inflation dove and Donald Kohn has talked only mildly of the possibility of the Fed tapering or reducing the cash it pours into the economy. Kohn said the Fed might “go with a very gentle first step–complete with caveats about how it could be reversed.” Charles Evans, president at the Chicago Fed, actually said he hoped inflation would quicken.”
There are a few exceptions: Esther George of the Kansas City Fed, Richard Fisher of the Dallas Fed and Charles Plosser in Philadelphia. But many of those who previously opposed inflating or reflating are now lining up with Bernanke. Noted scholar Kenneth Rogoff, who wrote This Time Is Different, a book about the damage debt does to growth, is also pro-inflation. Rogoff argues that central banks need to “convince the public of their tolerance for inflation.”
The uncertainty is magnified by the stand-off on fiscal policy – leading monetary doves to call for more quantitative easing. Reuters reported: “U.S. monetary policy is being kept easier to help offset the harm caused by political fighting in Washington, according to two senior Federal Reserve officials who warned on Thursday of damaging consequences if the nation defaults on its debt.
Atlanta Federal Reserve Bank President Dennis Lockhart said the disquiet resulting from the budget battle "vindicated" the Fed's surprise decision not to scale back its asset purchases at its meeting last month.
The Fed's decision to keeping buying bonds at an $85 billion monthly pace startled markets that had expected the U.S. central bank to begin to wind down its ultra-easy monetary policy, sending stocks and gold prices sharply higher.
Federal Reserve Chairman Ben S. Bernanke tries to make it clear that he intends to ease but only intends to ease the easing slowly of easy money. As the New York Times Binyamin Appelbaum reported in mid-July that in congressional testimony, Bernanke “emphasized on Wednesday that the central bank remains committed to bolstering the economy, insisting that any deceleration in the Fed’s stimulus campaign will happen because it is achieving its goals, not because it has lowered its sights.”
The problem, suggested Bernanke, lies with Congress. “The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recover,” said Bernanke to the House Financial Services Committee.
“I think the markets are beginning to understand our message and, you know, the volatility has obviously moderated,” said Bernanke. As the Financial Times’ Robin Harding “Bernanke went out of his way to argue that the Fed’s scenario for tapering down asset purchases – under which it would start later this year and bring asset purchases to a halt in the middle of 2014 with unemployment at 7 per cent – would depend entirely on the performance of the economy, and asset purchases could be increased if it does badly.”
The Fed-speak continued: “Moreover, so long as the economy remains short of maximum employment, inflation remains near our longer-run objective, and inflation expectations remain well anchored, increases in the target for the federal funds rate, once they begging are likely to be gradual.”
It’s not just the markets that have a hard time understanding the Fed. “The U.S. is communicating its monetary and fiscal policies as clearly as other major countries, a U.S. Treasury official said after finance chiefs from the Group of 20 nations called for greater transparency,” reported Bloomberg News a few days after Bernanke spoke. “Central banks have ample opportunities to share their plans during forums such as the G-20, said the official, who spoke in Moscow today on condition of not being further identified.”
After two days of talks in the Russian capital, the G-20 pledged “future changes to monetary policy settings will continue to be carefully calibrated and clearly communicated,” according to a statement released after the meeting.
Who knew money needed to be communicated? Bloomberg’s Kasia Klimasinska reported: “International Monetary Fund Managing Director Christine Lagarde said she alerted G-20 officials from advanced economies to indicate future adjustments in unconventional monetary policies, while urging emerging-market policy makers to prepare for future bouts of market volatility.”
So there. So clear.
The U.S. economy seems to be slowly recovering. The U.S. economy grew 2.5 percent in the first quarter of 2013, up from 0.4% at the end of 2013, but clearly there is still no tiger in the tank
Employment is up – and so is unemployment as more workers reenter the job market. MB Capital’s Marcus Bullus has dubbed it the “Goldilocks” recovery: “U.S. job growth is neither too hot nor too cold - and the market’s fears about QE tapering have dissolved like sugar in a bowl of warm oatmeal.”
Fed Chairman Ben Bernanke wants to wean the economy off QE – fearing some kind of violent withdrawal if he shuts off his bond buying too quickly. He seems to be taking his cue from “Pippin.” In the Broadway musical revival, the title character sings “On the right track, on the right track” as the “leading player” advises:
The meteor 1988QE2 recently passed harmlessly by the earth. Not so the more terrestrial QE2 and QE3 of the Federal Reserve. One of the clear fears about the potential nomination of Janet Yellen as chairman of the Fed is that she will de-emphasize controlling inflation in order to promote fighting unemployment. Yellen is know for her rigorous presentations of reasons to loosen monetary policy and de-emphasize inflation. She is highly regarded, even by critics and opponents.
And the Fed’s policies do have opponents. ProPublica’s Jesse Eisinger suggests that the world may have something to learn from hedge fund managers. “Many hedge fund managers have been predicting that high inflation and fleeing creditors would send interest rates skyrocketing. Stanley Druckenmiller, Paul Singer, J. Kyle bass and David Einhorn – all big names in the investing world – have warned against the supposedly runaway central banker [Ben S. Bernake]. Mr Durckenmiller siad that Mr. Bernanke was ‘running the most inappropriate monetary policy in history.”
Eisinger noted that New York Times columnist and many bloggers have excoriated the hedge fund managers. Eisinger described a mixed record of economic prophecy by the Fed before raising the question: “What if the Fed’s loose monetary policy, with its giant bonds purchases, is harmful?” Eisinger wrote: “It sure seems as if Fed policy is helping only the wealthy, and not doing much for the economy. The net worth of the top 7 percent of American households rose in the first two years of recovery, while the net worth of the bottom 93 percent declined. The percentage of working-age people who have jobs id dangerously low. Median income was lower in 2011 than it was in 1999.”
Still, noted Wall Street Journal: “Because inflation is so low, Fed officials think they’ll be able to move carefully. Even when the bond-buying program ends, the Fed’s other easy-money policies could continue for years. For instance, fed officials have signaled they expect to keep short-term interest rates near zero until the jobless rate hits 6.5%, which isn’t projected to happen until 2015 by most economists”
While acknowledging the less than altruistic intentions of hedge fund managers, Eisinger observed that “they can read markets, and they can see that the Fed isn’t engineering the hiring, inflation and recovery it would like.”
The convention wisdom at the Economist, Bloomberg and Financial Times is that Ben Bernanke should be doing even more to irritate the economy. Sorry, wrong word. They think Bernanke should stimulate the economy, but even within the Fed, there is dissent about continued quantitative easing as the solution for all the world’s problems.
More, more, more quantitative easing is a persistent theme of columnists in the Economist and the Financial Times. Keep the faucet open, they write. They make this argument particularly strenuously where the Bank of Japan is concerned.
Not that the faucets are open. Bloomberg’s Brendan Murray and Scott Lanman wrote that “the world’s four biggest developed-market monetary authority – the BOJ, the Fed, the European Central bank and the Bank of England – are aligned in their commitments to spur growth and return their economics to full strength....The Fed,, the EC and the BOJ have more than doubled the combined size of their balance sheets since the global financial crisis broke out in 2007, expanding them by a total $4.7 trillion. With the BOJ’s action, that amount could e increased by at least a further $1.3 trillion by the end by the end of 2014.”
With all this money, one would think that the rising flood would raise all boats. However, back in November, Dallas Federal Reserve President Richard Fisher remarked to CNBC’s Larry Kudlow: “Well, Larry, this is purely my opinion, but so far we have been carrying the ball trying to stoke recovery with monetary policy. It would be nice to have the fiscal authorities get their act together so we wouldn't be dependent on monetary policy. There's a limit to what we can do. We just can't have what I call a Buzz Lightyear monetary policy "to infinity and beyond" because every time we purchase a Treasury Security--and the duration of our securities and treasuries is now out to eight years, almost eight years--what we're doing is we're encumbering, as a fiduciary, those who will follow upon us and they're going to have some very tough Hobson's choices to make just as the Congress now has to make. I want the Congress to make them...”
Bloomberg News’s editorial board has taken a more expansive view. It recently observed: “The combination of QE and an explicitly higher inflation goal – the step central bankers are so reluctant to take – would be far more powerful than QE by itself. But the most powerful monetary stimulus of all would go even further than this. With or without a more commodious inflation target, QE is self-limiting in the sense that the central bank promises eventually to unwind it. This is why financial markets are so preoccupied with the Fed’s exit strategy. Once the U.S. economy is back at full employment, investors assume the Fed wills tart to sell the securities it has bought under the QE program back into the markets, thus shrinking its balance sheet, reducing the supply of money and returning monetary policy to normal operations.”
Jazz double bassist Charles Mingus thought you had to learn the musical craft before you played free jazz. The late Rev. Maurice Boyd wrote: “Mingus treated with fierce contempt those exponents of free jazz who aspired to be original before they had learned their notes, and thought themselves avant-garde before they had mastered their instruments. He had no respect for charlatans who wanted the haunting without the trying. Mingus thought of free jazz as Robert Frost thought of free verse: it was like playing tennis with the net down. Mingus used to say, ‘you can’t improve on nothin’, man. You gotta improvise on somethin.’”
When it comes to monetary policy, there has been a whole lot of improvisation over the last decade. And improv seems to be the main feature of the central bank presentations. It is unclear where all this improve leads. In an interview with Fortune magazine, FP Crescent Fund honcho Steven Romick argued: “The Federal Reserve cannot keep managing interest rates at these levels forever. It’s an incredibly dangerous strategy. Since the beginning of time, I don’t think an economy has successfully grown with government involvement to this degree.”
“If something cannot go on forever, it will stop, ” is the usual formulation of Stein’s Law What economist Herbert Stein actually said about the American balance-of-payments problem was: “But if it can’t go on forever it will stop. And if we never do anything that we can’t go on doing forever we will never do very much.”