The Fed Speaks To The Daily Capitalist*

It’s not often that I can listen to three Fed presidents speak at the same venue. Yet Dennis Lockhart of Atlanta, Charles Plosser of Philadelphia, and John Williams of San Francisco descended on my town to speak at my alma mater’s annual economic forecast program. It was important enough to be covered by the Wall Street Journal and others. It was topped off by a presentation by the Financial Times’s Gillian Tett, an award-winning financial writer. She finished the program up by conducting a panel of the three presidents.


Here is what the WSJ reported today (you can skim over this):

A trio of Federal Reserve officials said Thursday they expect growth to continue and inflation to stay low, although there were differences in how much progress they expect on the jobs front.

The remarks of the officials speaking Thursday came from the San Francisco Fed’s John Williams, the Atlanta Fed’s Dennis Lockhart and Charles Plosser of the Philadelphia Fed. They portrayed an environment in which the Fed has room to act because none of them saw much to worry about on the inflation front. The officials spoke at the University of California Santa Barbara Economic Forecast Project, held in Santa Barbara, Calif.

Their comments come in the wake of last week’s Federal Open Market Committee meeting, which left in place the policy makers’ collective expectation interest rates will stay very low until late 2014. The Fed also decided to continue forward with its $400 billion program to lengthen the average maturity of its $2.9 trillion balance sheet. But the waters were muddied by the release of Fed officials’ official forecasts that showed a diminished interest in keeping rates low.

“The nation remains far from the Fed’s assigned goal of maximum sustainable employment,” Williams said. “Under these circumstances, and with inflation close to our 2% target and well under control, it’s essential that we keep strong monetary stimulus in place for quite some time,” he said.

Williams is a voting member of the FOMC. He has been a consistent advocate of an aggressive policy response to continued high unemployment rates at a time when price pressures aren’t particularly high.

“I believe the threats to price stability are reasonably contained at present,” Lockhart said at the conference. Driven up by energy prices, “various core inflation measures have been trending just a shade above 2% over the past three months, but these trends are not expected to persist,” the official said.

What it means for policy is an open question, he said. “The Fed’s already done a lot to support the recovery,” Lockhart said. “Whether additional monetary-policy actions should be used at this time to try to speed things up has to be balanced against the risks to the Fed’s price-stability objective that could accompany an overestimating of the amount of economic slack–particularly labor-market slack,” he explained.

When it comes to the Fed providing more stimulus by buying bonds to expand the balance sheet, Lockhart said, “I wouldn’t rule it out. We have to keep all options on the table” in case the economy takes a serious turn for the worse. But he agreed with Williams, who said “I think our policy is properly calibrated” at the current point, for the expected path of the economy.

Plosser said while he doesn’t see a need for further stimulus, he could envision something happening if a deflationary price environment started to emerge.

While the officials expect price pressures to stay around the central bank’s 2% target, they differed a bit on how much can be achieved on the employment front. The government is set to release the April jobs report Friday, and there is some anxiety about what will happen to the unemployment rate, which was 8.2% in March.

Plosser said he expects the economy to expand by 3% this year and next. “My optimism is most evident in my projections for the unemployment rate,” Plosser said. “I believe that it will continue to drift down gradually, reaching 7.8% by the end of this year and near 7% by the end of 2013,” the official said.

Williams wasn’t so upbeat. “The economy is steadily improving and the outlook is for continued moderate growth,” he said. But that only means slow progress on jobs: “The unemployment rate will gradually decline, reaching about 7% at the end of 2014.”

Williams spent much of his speech trying to divine what the economy’s natural rate of unemployment is, because that level helps explain what can be achieved on the jobs front, and the threshold beyond which the economy will start to create inflation the Fed would be duty-bound to contain.

“I conclude that mismatches and other labor-market inefficiencies have raised the natural unemployment rate from about 5% before the recession to between 6 to 6 1/2% today,” Williams said, adding “most of these factors should recede over the next few years.”

Ultimately, “the elevated rate of unemployment is primarily due to a shortage of demand, not to structural changes in the labor market,” Williams said. Lockhart agreed, and he noted that the gap between the natural and actual unemployment rate is “substantial.”

In other comments, Lockhart said while he didn’t know what the level would be, he believes in a tightening cycle the Fed wouldn’t have to shrink its balance sheet to its precrisis level of $800 billion from the current $2.9 trillion. “I’m quite confident we have the draining tools ready,” he said, explaining “the end game is unlikely to be exactly what it was prior the crisis.”

The officials said they viewed Europe’s problems as a risk for the U.S. Plosser noted there is “a lot of uncertainty” surrounding events there, while Lockhart said he doesn’t expect the region to suffer an implosion.

Far be it for me to be disrespectful of these powerful titans of money supply, but … here is what I heard:

“Blah, blah, blah, blah. We’re not taking QE3 off the table. Blah, blah, blah.”

If you ever read the published speeches these gentlemen give, the first thing you will notice is that they really don’t say much. They are afraid that if they stray too far from the official line they will set off some kind of panic or adverse market reaction. Their job is to not make news. Mostly you have to listen very closely and read between the lines. The tea leaf types can read subtle changes in policy into these statements .

The other thing to be aware of is that their forecasts are usually wrong. Jim Rogers once remarked that Chairman Bernanke hasn’t been right once, ever. So I take what they say cum graino salis (with a grain of salt).

What was significant to me is that President Plosser, one of the Fed’s inflation hawks (they see inflation as a danger and that they cause it), acquiesced to the statements of his fellow panelists that QE3 would be on the table if things go south. The significance to me is that back in September he was concerned with stagflation. But now with stagnation on the way but with price inflation declining, it should give him an opening in which to support QE. Not good for us, but important for us to know.

These technocrats all believe in the same basic economic ideas:

1. That they as technocrats can manipulate money supply for the good of the economy.

2. They confuse price changes resulting from supply and demand with “inflation.”

3. That money printing can create wealth and thus, real economic growth.

4. They admit they can’t affect employment directly but that they can create a stable environment for the creation of jobs.

5. The Fed has no role in the creation of boom-bust business cycles.

6. The Fed can prevent economic collapse.

7. They can implement an exit strategy to drain the economy of excess money supply.

I suggest that none of their assumptions are correct.

Regardless, it was interesting. Gillian Tett was quick on her feet. The Presidents were predictably dull. The UCSB econ professor who organized the event (Peter Rupert) has real clout which is shown by his ability to attract these economic stars. Professor Rupert is sympathetic to Austrian School ideas as well.

Unfortunately they took no questions from the audience. Maybe they knew I would be there.

*And 1,000 others.


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