Rep. Bill Huizenga
Chairman, House Subcommittee on Monetary Policy and Trade
Suggested FSOC is a tool of the Fed to press fiscal agenda. ?60 new regulations, thousands of pages.
High degree of discretion… Fed makes it up as it goes, like Jazz.
Government knows best is not ?what is best for the economy as a whole.
The dual mandate allows the Fed to do things that go outside of what would be a strict monetary mandate — and what it can ultimately affect.
His bill HR 3189 will likely pass the House in the next few weeks, and then will head over to the Senate (where who knows will happen to it).
Aims to increase transparency and accountability of the Fed, and give more weight to the regional presidents. ?How large the audits would be is open. ?Emergency lending powers would be reduced. ?Five of seven governors and nine of twelve regional Fed Presidents would have to approve any emergency lending.
Fed would have to take a rules based strategy for monetary policy.
Q&A
1) David Malpass: Would the bill change IOER?
No.
2) Any audit of the IOER?
Not at present.
3) endthefed.info — goes into article 1.10 of the Constitution to have the states insist on commodity money — gold and silver?
How do we get back to a gold standard? ?How could we educate the public on its value? ?Would back money with a basket of commodities.
4) Torres of Bloomberg: what if the Fed buys more assets in another recession years from now?
Would lead to frustration. ?The Fed should not be in that business. ?Thinks many politicians are hypocritical because they tell the Fed what to do, and yet he gets accused of meddling with central bank independence.
5) Moderator notes that Elizabeth Warren wants to limit emergency lending — any chance for bipartisanship?
Quite possible, but banks will oppose it.
6) Alex Pollock: Sen. Shelby’s bill — how do you see his bill?
He doesn’t know enough to say, but he wants to get his bill through the House.
7) wouldn’t the Fed getting heavier regulation crash the equity markets?
This isn’t a question of that, everyone should have the same information and access to credit.
8) Can we keep Alexander Hamilton on the $10?
There are efforts to do that….
9) Buchanan suggested a monetary rule that would be in the Constitution?
They aren’t prescribing a rule. ?Only holding them to a rule that the?Fed itself?would specify.
10) What of the Senate Bill, and how will you work with it?
Speaker Ryan is handling the House well. ?We would like to do this on a bipartisan basis.
11) What to do with all of the reserves held at the Fed? Seiniorage?
PANEL 4: THE FED?S EXIT STRATEGY VS. FUNDAMENTAL REFORM
Moderator: Craig Torres
Reporter, Bloomberg
Jerry L. Jordan
Former President, Federal Reserve Bank of Cleveland
Lawrence H. White
Professor of Economics, George Mason University
Kevin Dowd
Professor of Finance and Economics, Durham University
Torres introduces White, who talks about the need for a Fed exit from credit policy
QE was not a monetary policy. ?M2 anemic amid a huge rise in the monetary base. ?High powered money ain’t. ?Did not want to see M2 rise, which would lead to inflation.
Fed sterilized through interest on excess reserves [IOER]. ?This favored housing over other uses of credit. ?Fiscal policy masquerading as monetary policy.
Dramatic impact on its portfolio duration and income. ?Record interest income. ?Most gets?gets rebated to the Treasury, rest to the banks. ?Thinks Fed’s average maturity has moved from 4 to 12 years. ?Buiter predicted it. ?Fed is doing it all?for the Treasury.
Fed shouldn’t allocate credit. ?Takes away Congress’s job of wasting money. [DM: he said it, not me] ?Now a demand comes for a Puerto Rico bailout. ?Can’t give away money costlessly, even if you print it.
Lowers penalty for failure. ?At present the Fed has no plans to exit credit allocation; Congress will have to act to end it.
Jerry Jordan: Fed built the financial bubble. ?13th Fed res bank? ?Think he’s talking about Fannie and Freddie…
Monetary authorities as eunuchs. ?Political Viagra needed. ?Has fiat money run its course?
Foreign banks borrowing from the FHLB.
Money multipliers broken, high powered money does not exist. ?Central bank balance sheet is unrelated to money conditions in the economy. ?QE can be contractionary. ?There is no possible exit from QE. ?Stopping QE was good, but ending it will not happen, because IOER and reverse repos are the rule. ?IOER borrows from banks and RR borrows from money market funds and GSEs.
Zero experience on IOER and Rev repos. ?Who knows what would happen if inflation rose?
Conclusion: aggressive Fed policy has had no impact on inflation, and the Fed does not truly affect credit at present. ?Thee are no tools now for dealing with a rise in inflation.
Torres: things are anything but normal now.
Dowd: Extreme Keynesian Policies have not delivered.
Hi recommendation: Recommoditize the dollar, recapitalize the bank, restore strong governance to banking, and roll back government intervention
?? Put Hetty Green on the $10 bill!
Commodity standards with a feedback rule. [DM: quack, quack]
Banks need to run with high levels of capital in order to take more risks. ?Higher standards, and less gameable. ?Riskier positions would be penalized.
Banks would not be able to pay bonuses, dividends, buy back stock until they were compliant. ?SIFI banks only at 7% GAAP capital, 5% under IFRS. ?Social consequences of higher bank capital levels are zero. ?Capital is not a “rainy day fund.” [True]
Bank directors would be limited to unlimited personal liabilities. ?Bring back double liability for shareholders? ?Unlimited liabiity for shareholders. ?Look at the investment banks; when they went public, they threw risk control away.
GSEs and Fed ?would be wound down. ?Oligarchy of bankers block reform. ?Take the crony out of capitalism.
Q&A
1) High capital requirements but deregulating — what are you proposing??Depositors will seek highest return, and create another type of moral hazard.
D: Aims for getting the government out of the economy.
2) Bert Ely: possibility for capital arbitrage? ?Also shadow banking?
D: Capital rules created capital arbitrage.
Another fellow suggested that banks would be entirely equity funded.
3) Question on abolishing cash?
D: Deflationary collapse.
4) What would happen if people were taxed for holding cash?
Much held by foreigners — punish them with negative interest rates. ?But it will never happen.
5) To Larry: what of negative interest rates. ?Wouldn’t assets still stay at the Fed for regulatory reasons?
W:???
6) Transition from monetary to fiscal policy at the Fed?
Bernanke’s theory was that housing had to be preserved above all else. ?Same thing for long term rates. ?Debt service costs to Treasuries reduced.
7) Wouldn’t negative interest rates destroy GDP?
Yes. then asked about whether there were any bond investors. ?Asked what would happen if the Fed tried to sell its mortgages.
Answer from one manager: I wouldn’t want to be the first buyer, and I wouldn’t trust the actions of the Fed… so the market and prices would back up considerably.
The Knowledge Problem — Hayek argued that knowledge is dispersed — impossible to aggregate it without incentives. ?What everyone knows is more than what regulators know. ?There is no way that a central planner (or banker) could know what the right answer is for economics. ?As such, socialism morphed to become social democracy. ?USSR collapsed.
Rules encapsulate important knowledge gained by society over time, which enables actors to have a better idea of what to do. ?Disclosure reduces fraud.
Monetary policy discretion gives too much power to a small group of men.
Pollock says that the Fed does not know what it is doing, and can’t know what it is doing. ?The problem is too complex, and the knowledge to get and interpret to too hard. ?Fed biggest SIFI of all, and creates more systemic risk than anyone. ?The Fed as a result has not done well in the past, and is unlikely to do so in the future.
Financial instability was not destroyed by the Fed; experts are often given to aggressive actions from bad theories. ?Faith in experts is a secular religious problem.
Prices quintupling in a lifetime is considered price stability.
“The Fed must be independent.” But if the Fed is not competent, then should it be independent? ?How and to whom should the Fed be accountable. ?No part of a democratic government should be unaccountable. ?The Fed must be responsible to Congress. ?That said, the Fed has often been a useful lapdog to the Congress… funding deficits, etc. ?Congress in 1963 agreed with this idea at the 50th anniversary of the Fed.
Humphrey Hawkins does not help accountability. ?Financial Accountability Improvement Bill — FOMC would have to make detailed reports to the Congress, including dissenting opinions.
Banking committees in both houses captured by the housing industry.
Calls for a joint committee on the Federal Reserve; should also be able to audit the Fed in any way appropriate.
“The money question” affects so many things that it needs to be broadly discussed.
David Malpass — Post-monetarism: the Fed’s Growth Options
Negative effects of Fed policy on the economy. ?Fed is huge and distortive.
ECB — buy anything at any time.
ZIRP will weigh on growth for decades.
Post-monetarism — direct regulation of the financial system. ?Monetary and credit policies merged. ?Credit growth is slower as a result. ?Required bank reserves have fallen and are rising now. ?No transmission of M0 into other aggregates. ?Fed buys long bonds and advantages them — benefits government and corporations.
Core capex orders are weak. ?Employment to population ratio at a low, forget the unemployment rate. ?Median household income is declining — increased inequality.
Fed has four options to boost growth:
a) move rates above the zero bound. ?Aids savers and would be a loosening of credit. ?Maybe the interbank laon market would increase.
b) taper reinvestment, and free up Treasuries for liquidity and collateral. ?Fed assets at $4.5T. ?Banks assets currently at Fed.
c) Increase repo borrowing. ?Fed Liabs at $4.4T. ?More credit gets pushed out to banks. ?Would be more idle cash to lend.
d) Fed has a severe bunching of maturing assets in the short run. ?Presently would invest maturing assets long. ?Should the Fed own long duration assets?
Q&A — 1) no one has the interests of everyone else at heart. ?Central bankers have poor incentives — they maximize for themselves
O’D: even with good motives, they can’t get it right
M: Quis Custodes Custodiet.
2) Freedom: gold can’t be counterfeited, debased, maximize freedom.
P: American dollar good as gold — Bretton Woods. ?Silver Certificates were repudiated.
Labor gets reallocated to lower productivity areas
Sectoral misallocation of resources — 6% of GDP lost
Allocation, not total amount of credit is key. ?Blancesheet reform and structural reforms. ?Macroeconomic models need to move beyond one simple benchmark.
3) Deflation can be good or bad — deflation is not always bad for output — the link between deflation and growth?is weak, and nonexistent without the Great Depression
No evidence of Fisherian debt deflation, but property prices react to private debt levels. [DM: not sure what he is going for here]
Supply driven deflations are good, demand driven bad.
Thus move away from deflation to avoiding financial crises.
4) Different view of the fall in real rates — Global rise in debt, and rates go lower because it is difficult to incent people to take on more debt.
Low rates in one place can influence behavior elsewhere — thus the recent increase in external dollar liabilities. ?Also, low interest?rates globally.
5) Early warnings of banking distress — if we focus on financial crises, how do you craft policy?
If you use credit measures — can get a better view of GDP
Macroprudential policy operates in a similar way.
Focusing on financial crises would neglect inflation.
His conclusion is that a monetary focus on financial stability will lead to the best growth in GDP.
1990s a disequilibrium situation, with asymmetric monetary policy leading to an explosion in debts.
Quotes Twain on what you know that just ain’t so is that which hurts you.
Q&A 1) Tavlas — low inflation makes it difficult to get out of debt. Eurozone deficit nations can’t regain competitiveness, can’t reduce wages enough.
B: You make good points, but asset prices matter highly — we need to look at those.
2) Selgin — if productivity-driven, it will not be deflationary.
B: repair is slow; monetary policy could not do much to fix?a financial crisis
3) Real time, difficult to tell whether supply or demand-driven.
B: Booms and busts would be reduced if we did this.
Moderator: Jeffrey A. Miron
Senior Lecturer, Harvard University, and Senior Fellow, Cato Institute
Charles I. Plosser
Former President and CEO, Federal Reserve Bank of Philadelphia
John B. Taylor Mary and Robert Raymond Professor of Economics, Stanford University
George A. Selgin
Director, Cato Center for Monetary and Financial Alternatives
Scott B. Sumner
Director, Program on Monetary Policy, Mercatus Center, George Mason University
=–==-=-
Missed Plosser.
Got here in time to hear Taylor. Mentions the effects of non-rule-based monetary policy. ?Notes how capital controls are being tolerated more and more. ?More and more volatility in financial markets.
Mentions how he called the change in 2003-5, and how QE is essentially anti-rule in its application. ?”QE begets QE.”
Central banks follow each other more and more. ?Rules based policy is not impossible per se. ?If more nations were to follow them, you could get a global economy that is rule based.
“Rule-based policy begets rule-based policy.” Would not threaten independence of Central Banks.
Selgin — Real & Pseudo Monetary Rules [playing off Friedman Real and Pseudo Gold Standard]
Should rule out capricious monetary policy a la Venezuela — avoid political influence. ?Could allow for a more timely policy than discretion might achieve. ?Rules aid credibility.
Rules are no good if they aren’t followed and enforced. ?Robust rules would not lead to regret.
Pegged exchanged rate is a pseudo-rule. ?Audit the Fed has weak rules and enforcement/consequences.
A psuedo rule could be worse than discretion. ?When the rule breaks there could be negative results.
Suggests that a contractual rule provides sanctions. ?Nonadherence to a standard leads to losses. ?Monetary policy via government promises versus private contract will fail, promises will be broken.
If monetary instruments are targets, easy to achieve, but may not do good for the economy. ?Feedback rules could be the best. ?Long and variable lags will apply.
Dollarization, Bitcoin, blah, blah, blah… slight diss of Scot Sumner
Scott Sumner: Nudge the Fed to a rules based, nominal GDP based approach. ?Central banks move slow. Three pragmatic reforms:
Define stance of monetary policy — is policy easy or tight?
Make Fed more accountable — revisit past policy ex post
Take small steps toward NGDP targeting.
We don’t clearly know whether policy is truly tight or loose. ?What is the right variable?
Interest rates don’t measure the status of monetary policy. ?Asset prices showed policy was tight as prices fell in 2008. ?Mishkin — NGDP.
NGDP looks at both the supply side and demand side. ?Bernanke admitting mistakes [DM: but does not admit anything on the 2000-2005 overexpansion of liquidity].
Asks that the Fed look back over 1-2 years to analyze how monetary policy really was in terms of tightness. ?Level targeting within bounds would give guidance to decisions.
NGDP futures market proposed. ?[DM: that is a punters market, and won’t work.
Q: to Sumner: NGDP includes govt spending, so it can be gamed.
S: too big too exclude. ?Aggregate nominal labor compensation might be better as a target.
Q: David Malpass: what would work better for tight/loose than interest rates?
Taylor: money growth — rules vs not are a more important thing
Q: Bert Ely: Why not let the market dictate policy?
Selgin: that could be gamed. ?Fiat money is artificially scarce. ?Not sure what you would actually target, feed back, etc.
Q: is the dual mandate a good thing?
Plosser: the dual mandate is important. ?Actual text of the dual mandate is important — and it does have its problems, because it creates discretion.
Press conference w/Bullard: embargoed until end of talk. ?[everything is a paraphrase here, and I can’t get everything down, as with everything at this conference]
Neo-Fisherian ideas are interesting and worthy of further talking about, but don’t take them too seriously.
The longer you are at a zero bound — the neo-Fisherian effects get larger.
Q: new monetary consensus of a?low nominal world. ?Won’t the abnormal become normal?
B: ECB and Japan still doing QE. ?We are now?trying to normalize.
Q: Balance sheet. edging up rates?
B: liftoff, then review the balance sheet. ?Gradualism will be the normal policy, more shallow than 1994 or 2006. ?Won’t have credibility on gradualism until the second move. ?More on gradualism — not a constant slope, but state-dependent.
Q: [Bloomberg] ?Why go gradually?
B: He has higher dots. ?Forecasts lower unemployment. ?Need to see how things evolve.
Q: Wan’t it difficult for the Fed to veer from prior policy moves?
B: You have to retain your options, and move accordingly. ?Labor markets could tighten considerably.
Q: [Dow Jones] Any concern that you will have unanticipated effects on the ECB and World?
B: No. Those are priced in anyway.
Q: keeping the markets calm?
B: we won’t give a total roadmap, we can’t. ?It won’t be like 1994. ?We will communicate more.
Q: Chorus of criticism from the GOP?
B: Fed has been in the middle of the action since the crisis. ?Adds to a healthy debate on priorities for monetary policy. ?What should we have has targets…
Q: Is the FOMC shifting its official inflation measure? ?Dallas Fed Trimmed Mean?
B: Trimmed mean is better statistically. ?Target should be overall inflation.
Now it is time for Lacker
Jury is still out on how we handled on 2008-9. ?Not surprised on the political furor.
Q: What will happen when FOMC raises rates?
L: should be smooth. ?News will be in the announcement. ?Shouldn’t be a surprise.
Q: ??
L: My dots are above median. Should be a flatter cycle.
Q: Regarding his paper, if the price level is all that matters, why not have the 2% more prominent?
L: Can’t reject the possibility that chance is keeping inflation low, and a slow-moving component. ?Communications are pretty clear now.
Q [marketwatch] FOMC behind curve?
L: We might be, we might not.
Q: Possible that Fed won’t be gradual?
L: Possible. ?Consider inflation 2003-2004 to 2007, we got behind on inflation.
Q: any reform ideas you might support?
L: IOER given to Board, should go to the FOMC.
Q: should a Taylor rule be mandated?
L: wouldn’t mandate it, we even consider them, and maybe we should discuss why we differ from them.
Q: your view on the balance sheet?
L wind down quickly, if possible.
Q: my question on whether globalization and technology affecting the ?labor share and thus monetary policy?
L: models could take account of that if they wanted to — depends what you think the goals of policy are. ?If inflation only, a focus on employment might have an effect, or we could end up pursuing pushing for unemployment that we can’t achieve.
Moderator:Jon Hilsenrath
Chief Economics Correspondent, Wall Street Journal
Jeffrey M. Lacker
President and CEO, Federal Reserve Bank of Richmond
George S. Tavlas
Member, Monetary Policy Council, Bank of Greece
Manuel S?nchez
Deputy Governor, Bank of Mexico
Panel starts with Hilsenrath introducing?Manuel S?nchez. ?Argues that monetary policy should have modest objectives. ?Takes a conventional view that some inflation is good, that monetary policy is powerful and can deal with macroeconomic problems. ?Favors the lender of last resort powers of the Central Bank a la Bagehot.
Monetary policy can best serve markets by not being distracted from the main goals — low inflation and macroeconomic stability. ?If monetary policy gets too many goals, it will not achieve its important goals, and may not truly achieve much useful at all. ?After all, look at the loose policy prior to the Great Depression, and possibly loose policy prior to the recent financial crisis.
Current policy may be creating financial imbalances now, and lack of incentive for governments to get their own houses in order.
Emerging economies have their own issues with monetary policy, with many cutting rates (DM: competitive devaluation). ?Now many emerging economy central reverse those moves, amid rising risks.
Now?George S. Tavlas — should monetary policy be based on rules vs discretion? ?Taylor Rule makes monetary policy transparent and predictable. ?Failure to follow the Taylor Rule 2003-6 led to the financial crisis. ?Bernanke argues for freedom.
Asks what would Milton Friedman would do now? ?Depends on which Milton Friedman you talk about, as he was a Keynesian (1946) and became a monetarist. ?W/Schwartz in 1948, started writing their book on monetary policy. ?Their arguments stemmed from the long run effect, versus a short run effect which could be highly variable. ?Argued that the collapse of monetary aggregates in 1929-32 led to the Great Depression, and that a simple rule could prevent stupid policymakers.
Friedman felt that feedback policy rules?injected too much judgment and discretion, and model risk.
Yet they would be better than raw discretion. ?Arthur Burns, teacher of Friedman in the 50s, former Fed Chair, gave into political pressure. ?Tavlas thinks that the performance of monetary policy in 90s would favorably dispose Friedman to a Taylor rule.
Cites what Bernanke said to Friedman at his 90th birthday. ?Odd comment on how a rule at U Chicago led to Friedman’s marriage to Rose.
Now?Jeffrey M. Lacker,?President and CEO, Federal Reserve Bank of Richmond. ?Argues that monetary policy is undiminished in its ability to affect the price level in the long term. ?Ability to affect real variables is limited and transitory.
Argues on a popular view of resource use a la the Phillips curve — that overuse of resources leads to inflation.
Argues that the zero lower bound does not constrain policy now, but that short rates should rise now. ?The existing inflation rates may be overly low for random reasons.
Doesn’t think that the increase in the Fed’s balance sheet has any long-term effect on the economy.
Argues for limited goals for monetary policy.
Q&A 1 — Hilsenrath: talk about monetary policy inflation targets. Gold standard, NGDP, etc., should there be a discussion for a new target on monetary policy?
Lacker — present target works well. ?Absent a rule a la Taylor other rules will not work well. ?Gold standard does not work well, and does not provide price stability.
Hilsenrath — Asset inflation?
Lacker — that should not be a goal for monetary policy.
Tavlas — gold standard had adjustment methods that worked pre-1914. ?Unemployment was not a consideration. Union power in the 20s pushed for employment as a factor in monetary policy, and wages would no longer adjust lower.
Argues that when rates were?raised to deal with an incipient asset bubble — great depression. ?Eventually said that the CPI was a fine goal.
Sanchez also agrees with a CPI goal. ?Says it is difficult to spot bubbles, and they may be due to fiscal policies.
Q2 — Mike Mork, ?asks?about the drop in velocity of M2. ?Why?
Lacker doesn’t know. ?(Nice honest answer.) ?Increase in currency abroad?
Q3 — Lacker says that non-economists are a good influence on the FOMC and a diversity of views.
Q4 — Hilsenrath — Is there a monoculture of views among Ph.D. economists at the Fed.
Lacker — Economists disagree with each other.
Q5 — Josh Crum — what do you do with people bypassing banks in the future?
Lacker — not sure how what the Fed can or should do on that issue. ?Has a lot of thoughts, but not so many conclusions. ?Mentions repos and money market funds, and the need for maturity transformation.
Q6 — Hilsenrath — should the ECB do more QE?
Tavlas — ECB thinks they can’t affect real variables, but can affect price inflation.
Hilsenrath — but is it working?
Tavlas — takes time for monetary policy to work. ?Should eventually work.
Q7 — David Malpass — will the Fed raising rates be stimulative?
Lacker can’t see stimulus. ?Can’t see how credit demand would increase even if supply does.
Q8 — Hilsenrath asks how Fed’s moves may affect Mexican monetary policy
Sanchez — Fed creates volatility,?with rising rates peso may devalue, and inflation may rise in Mexico, but we will adjust to conditions as the Mexican economy changes. ?They will takes foreign monetary policy into account as it affects inflation.
He thinks they have been lucky so far.
Hilsenrath — how does the global slowdown affect your policy?
Sanchez — can’t avoid taking the Fed into account, they are just too big.
He’s arguing that monetary policy has been too loose for too long, though a zero percent policy was needed for a time. ?Cites this paper here. ?Gives a confusing neo-Fisherian model — simple models don’t do justice to a complex economy. ?Argues that low rates lead to low price inflation. ?(Personally, all of this neglects demographics, and the relative propensity of monetary policy to funnel marginal money into asset or goods markets.)
Monetary policy near the zero bound creates its own demand for abnormal policy tools. ?Thinks that economy is pretty normal now, and there is no need for excess stimulus now. ?Thinks that current policy will lead to bad results if maintained.
Q&A — Selgin of Cato — Says Fisher would spin in his grave, that public natively facilitates Fed policy, which is not natural.
Fisher argues that you have to have an equilibrium concept in economics. ?How than to explain low rates and low inflation.
Q2 — Politics and the Fed — what does he think of GOP candidate comments?
Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace.
Information received since the Federal Open Market Committee met in September suggests that economic activity has been expanding at a moderate pace.
Shows less certainty about current GDP.
Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft.
Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft.
Shades up household spending.
The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year.
The pace of job gains slowed and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year.
Shades labor employment down a little.
Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.
Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.
No change.
Market-based measures of inflation compensation moved lower; survey-based measures of longer-term inflation expectations have remained stable.
Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.
No change. Any time they mention the ?statutory mandate,? it is to excuse bad policy.
Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.
Well, that sentence lasted for one meeting.? Would that more got chopped out of the statement.
Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate.
The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate.
No real change.
The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
CPI is at +0.0% now, yoy.? States that they have a global view of what they need to watch.? Good luck with that.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Gives the impression that a change might be coming at the next meeting, but the way the FOMC thinks about monetary policy is currently scattered, to say the least.
I wouldn?t make too much of this change.? The FOMC is big on their newfound flexibility, and isn?t going to be very predictable for some time.
The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
No change.
No rules, just guesswork from academics and bureaucrats with bad theories on economics.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
No change.? Changing that would be a cheap way to effect a tightening.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
No Change.
?Balanced? means they don?t know what they will do, and want flexibility.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.
Still a majority of doves.
We need some people in the Fed and in the government who realize that balance sheets matter ? for households, corporations, governments, and central banks.? Remove anyone who is a neoclassical economist ? they missed the last crisis; they will miss the next one.
Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.
Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.
No change.? Lacker dissents, arguing policy has been too loose for too long.
Comments
This FOMC statement was yet another great big nothing. Only notable changes were shading household spending up, and employment and GDP down.
Don?t expect tightening in December. People should conclude that the FOMC has no idea of when the FOMC will tighten policy, if ever.? The FOMC says that any future change to policy is contingent on almost everything.
On the new phrase, ?whether it will be appropriate to raise the target range at its next meeting,? I would not make much of it. It gives the impression that a change might be coming at the next meeting, but the way the FOMC thinks about monetary policy is currently scattered, to say the least.? I wouldn?t make too much of this change.? The FOMC is big on their newfound flexibility, and isn?t going to be very predictable for some time.
Despite lower unemployment levels, labor market conditions are still pretty punk. Much of the unemployment rate improvement comes more from discouraged workers, and part-time workers.? Wage growth is weak also.
Equities fall and bonds rise. Commodity prices fall and the dollar rises.? This is a sign that the markets anticipate more economic weakness.
The FOMC says that any future change to policy is contingent on almost everything.
Don?t know they keep an optimistic view of GDP growth, especially amid falling monetary velocity.
The key variables on Fed Policy are capacity utilization, labor market indicators, inflation trends, and inflation expectations. As a result, the FOMC ain?t moving rates up, absent improvement in labor market indicators, much higher inflation, or a US Dollar crisis.
We have a congress of doves for 2015 on the FOMC. Things will continue to be boring as far as dissents go.? We need some people in the Fed and in the government who realize that balance sheets matter ? for households, corporations, governments, and central banks.? Remove anyone who is a neoclassical economist ? they missed the last crisis; they will miss the next one.
These are just notes on the proposal so far. ?Here goes:
1) It’s a solution in search of a problem.
After the financial crisis, regulators got one message strongly — focus on liquidity. ?Good point with respect to banks and other depositary financials, useless with respect to everything else. ?Insurers and asset managers pose no systemic risk, unless like AIG they have a derivatives counterparty. ?Even money market funds weren’t that big of a problem — halt withdrawals for a short amount of time, and hand out losses to withdrawing unitholders.
The problem the SEC is trying to deal with seems to be that in a crisis, mutual fund holders who do not sell lose value from those who are selling because the Net Asset Value at the end of the day does not go low enough. ?In the short run, mutual fund managers tend to sell liquid assets when redemptions are spiking; the prices of illiquid assets don’t move as much as they should, and so the NAV is artificially high post-redemptions, until the prices of illiquid assets adjust.
The Commission will consider proposed amendments to Investment Company Act rule 22c-1 that would permit, but not require, open-end funds (except money market funds or ETFs) to use ?swing pricing.??
Swing pricing is the process of reflecting in a fund?s NAV the costs associated with shareholders? trading activity in order to pass those costs on to the purchasing and redeeming shareholders.? It is designed to protect existing shareholders from dilution associated with shareholder purchases and redemptions and would be another tool to help funds manage liquidity risks.? Pooled investment vehicles in certain foreign jurisdictions currently use forms of swing pricing.
A fund that chooses to use swing pricing would reflect in its NAV a specified amount, the swing factor, once the level of net purchases into or net redemptions from the fund exceeds a specified percentage of the fund?s NAV known as the swing threshold.? The proposed amendments include factors that funds would be required to consider to determine the swing threshold and swing factor, and to annually review the swing threshold.? The fund?s board, including the independent directors, would be required to approve the fund?s swing pricing policies and procedures.
But there are simpler ways to do this. ?In the wake of the mutual fund timing scandal, mutual funds were allowed to estimate the NAV to reflect the underlying value of assets that don’t adjust rapidly. ?This just needs to be followed more aggressively in a crisis, and peg the NAV lower than they otherwise would, for the sake of those that hold on.
Perhaps better still would be provisions where exit loads are paid back to the funds, not the fund companies. ?Those are frequently used for funds where the underlying assets are less liquid. ?Those would more than compensate for any losses.
2) This disproportionately affects fixed income funds. ?One size does not fit all here. ?Fixed income funds already use matrix pricing extensively — the NAV is always an estimate because not only do the grand majority of fixed income instruments not trade each day, most of them do not have anyone publicly posting a bid or ask.
In order to get a decent yield, you have to accept some amount of lesser liquidity. ?Do you want to force bond managers to start buying instruments that are nominally more liquid, but carry more risk of loss? ?Dividend-paying common stocks are more liquid than bonds, but it is far easier to lose money in stocks than in bonds.
Liquidity risk in bonds is important, but it is not the only risk that managers face. ?it should not be made a high priority relative to credit or interest rate risks.
3) One could argue that every order affects market pricing — nothing is truly liquid. ?The calculations behind the analyses will be fraught with unprovable assumptions, and merely replace a known risk with an unknown risk.
4)?Liquidity is not as constant as you might imagine. ?Raising your bid to buy, or lowering your ask to sell are normal activities. ?Particularly with illiquid stocks and bonds, volume only picks up when someone arrives wanting to buy or sell, and then the rest of the holders and potential holders react to what he wants to do. ?It is very easy to underestimate the amount of potential liquidity in a given asset. ?As with any asset, it comes at a cost.
I spent a lot of time trading illiquid bonds. ?If I liked the creditworthiness, during times of market stress, I would buy bonds that others wanted to get rid of. ?What surprised me was how easy it was to source the bonds and sell the bonds if you weren’t in a hurry. ?Just be diffident, say you want to pick up or pose one or two?million of par value in the right context, say it to the right broker who knows the bond, and you can begin the negotiation. ?I actually found it to be a lot of fun, and it made good money for my insurance client.
5) It affects good things about mutual funds. ?Really, this regulation should have to go through a benefit-cost analysis to show that it does more good than harm. ?Illiquid assets, properly chosen, can add significant value. ?As Jason Zweig of the Wall Street Journal said:
The bad news is that the new regulations might well make most fund managers even more chicken-hearted than they already are ? and a rare few into bigger risk-takers than ever.
You want to kill off active managers, or make them even more index-like? ?This proposal will help do that.
6) Do you want funds to limit their size to comply with the rules, while the fund firm rolls out “clone” fund 2, 3, 4, 5, etc?
Summary
You will never fully get rid of pricing issues with mutual funds, but the problems are largely self-correcting, and they are not systemic. ?It would be better if the SEC just withdrew these proposed rules. ?My guess is that the costs outweigh the benefits, and by a wide margin.
