Up and Down Wall Street
THURSDAY, JUNE 21, 2012
Twist, but No Shout
By RANDALL W. FORSYTH
.
The Fed takes the safe policy tack even as economic outlook worsens. Saving their bullets.
Ben Bernanke has a lot to learn from the corporate world. In a well-worn
routine preceding every corporate earnings season, chief financial officers
lower "guidance" about the quarter's results, so the numbers can "beat
expectations" when they're reported and produce a lift to the stock price. So
the companies are rewarded for doing no more -- or even less -- than what was
expected initially.
.The Federal Reserve chairman wound up having to do just the opposite. The central bank was "too optimistic," in its expectations for the economy, he admitted in his press conference Wednesday following the conclusion of the Federal Open Market Committee's two-day policy-setting meeting. That was apparent in a reduction of the panel's expectations for gross domestic product growth and an increase in its projection for the unemployment rate.
.
As a result, Bernanke added, the FOMC had to "add accommodation" in its monetary policy. Specifically, the Fed will extend its current Operation Twist through the end of year, swapping some $267 billion of shorter-term Treasury securities for longer-dated paper. Numbers aside, the real take-away is that the Fed missed its numbers, in stock-market parlance, and this was the least it could get away doing to compensate.
.
The Federal Reserve chairman and his associates, notably Vice Chair Janet Yellen, have given the markets plenty of reason in various speeches to believe the central bank is prepared to act to bolster the tepid U.S. recovery. So, given the recent spate of economic data -- rated M for Meh -- market participants had been set up for some action, more Operation Twist at a minimum.
.
That the FOMC opted for the minimal response was reflected in the questions from reporters at Bernanke's press conference. One line of questioning was, given the downgrade of the Fed's economic projections why didn't it take more aggressive action? Conversely, given the already record-low level of Treasury yields and the lack of economic response, what could be gained from further contortions of the yield curve through Operation Twist?
.
Legitimate questions, to be sure. The FOMC's "central tendency" for GDP was revised down to 1.9%-2.4% for 2012 from 2.4%-2.9% less than two months ago after the previous meeting concluded on April 25. (Let's call it two-ish percent from the mid-twos. Economists use decimals points to show they have a sense of humor.) Next year's growth was lowered to 2.2%-2.8% from 2.7%-3.1%--just in line with the panel's estimate of the economy's long-run growth 2.3%-2.5%.
.But coming out of the worst recession since the 1930s, the economy ought to be ripping along to make up for earlier shortfalls -- especially with the record application of monetary and fiscal stimuli that injected trillions into the U.S. economy.
.
So, with the Fed facing criticism for both having done not enough by its critics on the Left and for doing too much according to its critics on the right, the central bank took steps that were "modest" and "incremental" representing "the path of least resistance," according to Vincent Reinhart, chief U.S. economist at Morgan Stanley and a former high-level Fed insider. He suggests the Fed "has lost confidence it has a tool to make a difference" for the economy.
.
Bernanke disputed that notion, contending the Fed wasn't out of tools once short-term interest rates -- central banks' traditional policy lever -- hit zero. That happened back in late 2008 in the wake of the financial crisis. And the FOMC at the beginning of the year announced its intent to maintain its target for the overnight federal funds rate at "exceptionally low" levels through the end of 2014.
.
Mostly unnoticed, that consensus became tighter at this week's meeting. The FOMC's assessment of future monetary policy had 11 of the 19 total participants keeping the funds rate well under 1% by the end of 2014. (That takes in the seven members of the Federal Reserve Board plus the 12 Fed district bank presidents, five of which vote on a rotating basis except for the New York Fed president who has a permanent vote.)
But in April, only seven FOMC participants thought the fed-funds target would be under 1% by the end of 2014 while 10 thought it would be higher. (There were two vacancies on the Fed's Board then, which since have been filled.) That suggested the long-term intent was more of a committee compromise engineered by the chairman than a solid consensus.
.
The weaker economic outlook and greater agreement that short-term rates will remain ultra-low still raises the question of why Bernanke & Co. didn't take stronger action. Unlike corporate America, which tries to lower expectations in order to beat them, the Fed is necessarily reactive.
.
In his presser, Bernanke noted there are costs and risks to more aggressive actions, such as quantitative easing -- the outright purchase of securities to expand the central bank's balance sheet. Not the least of which is the political ire from Republicans, including presumptive presidential nominee Mitt Romney, who has vowed to fire the Fed chairman if elected. No matter that George W. Bush named Bernanke to the Fed Board, as chairman of his Council of Economic Advisors and then Fed Chairman.
.
That's best left to Georgetown parlor talk. Notwithstanding Bernanke's insistence the central bank still has plenty of firepower at its disposal, it would seem he would want to hold back some ammunition in the event of an outright downturn in the economy or a renewed global crisis, as happened in 2008-09. Then he could pull the trigger of quantitative easing to counter attacks on the financial system.
.Ultimately, monetary policy is the least of the U.S. economy's problems while it hurtles to the fiscal cliff at year's end. When the prospect of a sharp contraction in 2013 imposed by sharp tax hikes and draconian spending cuts hits the stock market and sends the averages into bear-market territory, the Fed will likely act. But not before.
.
Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved
.The Federal Reserve chairman wound up having to do just the opposite. The central bank was "too optimistic," in its expectations for the economy, he admitted in his press conference Wednesday following the conclusion of the Federal Open Market Committee's two-day policy-setting meeting. That was apparent in a reduction of the panel's expectations for gross domestic product growth and an increase in its projection for the unemployment rate.
.
As a result, Bernanke added, the FOMC had to "add accommodation" in its monetary policy. Specifically, the Fed will extend its current Operation Twist through the end of year, swapping some $267 billion of shorter-term Treasury securities for longer-dated paper. Numbers aside, the real take-away is that the Fed missed its numbers, in stock-market parlance, and this was the least it could get away doing to compensate.
.
The Federal Reserve chairman and his associates, notably Vice Chair Janet Yellen, have given the markets plenty of reason in various speeches to believe the central bank is prepared to act to bolster the tepid U.S. recovery. So, given the recent spate of economic data -- rated M for Meh -- market participants had been set up for some action, more Operation Twist at a minimum.
.
That the FOMC opted for the minimal response was reflected in the questions from reporters at Bernanke's press conference. One line of questioning was, given the downgrade of the Fed's economic projections why didn't it take more aggressive action? Conversely, given the already record-low level of Treasury yields and the lack of economic response, what could be gained from further contortions of the yield curve through Operation Twist?
.
Legitimate questions, to be sure. The FOMC's "central tendency" for GDP was revised down to 1.9%-2.4% for 2012 from 2.4%-2.9% less than two months ago after the previous meeting concluded on April 25. (Let's call it two-ish percent from the mid-twos. Economists use decimals points to show they have a sense of humor.) Next year's growth was lowered to 2.2%-2.8% from 2.7%-3.1%--just in line with the panel's estimate of the economy's long-run growth 2.3%-2.5%.
.But coming out of the worst recession since the 1930s, the economy ought to be ripping along to make up for earlier shortfalls -- especially with the record application of monetary and fiscal stimuli that injected trillions into the U.S. economy.
.
So, with the Fed facing criticism for both having done not enough by its critics on the Left and for doing too much according to its critics on the right, the central bank took steps that were "modest" and "incremental" representing "the path of least resistance," according to Vincent Reinhart, chief U.S. economist at Morgan Stanley and a former high-level Fed insider. He suggests the Fed "has lost confidence it has a tool to make a difference" for the economy.
.
Bernanke disputed that notion, contending the Fed wasn't out of tools once short-term interest rates -- central banks' traditional policy lever -- hit zero. That happened back in late 2008 in the wake of the financial crisis. And the FOMC at the beginning of the year announced its intent to maintain its target for the overnight federal funds rate at "exceptionally low" levels through the end of 2014.
.
Mostly unnoticed, that consensus became tighter at this week's meeting. The FOMC's assessment of future monetary policy had 11 of the 19 total participants keeping the funds rate well under 1% by the end of 2014. (That takes in the seven members of the Federal Reserve Board plus the 12 Fed district bank presidents, five of which vote on a rotating basis except for the New York Fed president who has a permanent vote.)
But in April, only seven FOMC participants thought the fed-funds target would be under 1% by the end of 2014 while 10 thought it would be higher. (There were two vacancies on the Fed's Board then, which since have been filled.) That suggested the long-term intent was more of a committee compromise engineered by the chairman than a solid consensus.
.
The weaker economic outlook and greater agreement that short-term rates will remain ultra-low still raises the question of why Bernanke & Co. didn't take stronger action. Unlike corporate America, which tries to lower expectations in order to beat them, the Fed is necessarily reactive.
.
In his presser, Bernanke noted there are costs and risks to more aggressive actions, such as quantitative easing -- the outright purchase of securities to expand the central bank's balance sheet. Not the least of which is the political ire from Republicans, including presumptive presidential nominee Mitt Romney, who has vowed to fire the Fed chairman if elected. No matter that George W. Bush named Bernanke to the Fed Board, as chairman of his Council of Economic Advisors and then Fed Chairman.
.
That's best left to Georgetown parlor talk. Notwithstanding Bernanke's insistence the central bank still has plenty of firepower at its disposal, it would seem he would want to hold back some ammunition in the event of an outright downturn in the economy or a renewed global crisis, as happened in 2008-09. Then he could pull the trigger of quantitative easing to counter attacks on the financial system.
.Ultimately, monetary policy is the least of the U.S. economy's problems while it hurtles to the fiscal cliff at year's end. When the prospect of a sharp contraction in 2013 imposed by sharp tax hikes and draconian spending cuts hits the stock market and sends the averages into bear-market territory, the Fed will likely act. But not before.
.
Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved
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