Federal Reserve Chairman Ben Bernanke is tightening his control of Fed communications to ensure investors hear his pro-stimulus message over the more hawkish views from the regional bank presidents.
The Fed chairman, starting today, will cut the time between the release of post-meeting statements by the Federal Open Market Committee and his news briefings, giving investors less opportunity to misperceive the Fed’s intent. In recent presentations, he has pledged to sustain easing, defending $85 billion in monthly bond purchases during congressional testimony last month and warning that “premature removal of accommodation” may weaken the expansion.
“Bernanke rightly views it as imperative to get out in front of any movement to quickly pull away from stimulus, and to signal that to markets,” said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore who worked at the Fed’s division of monetary affairs from 2004-08. Bernanke “felt he needed to take the wheel” of communications to dispel any misperception that the Fed will end bond purchases too soon.
Bernanke’s push to continue record stimulus faltered with the Jan. 3 release of minutes from the Fed’s December meeting, which said several officials favored slowing or stopping bond buying well before the end of 2013.
In his congressional testimony Feb. 26 and 27 and a March 1 speech at the Federal Reserve Bank of SanFrancisco, Bernanke promoted the Fed’s bond purchases, saying stimulus shouldn’t be slowed by financial-stability concerns. Vice Chairman Janet Yellen echoed those views March 4.
The Fed chairman wants to avert an unintended rise in Treasury yields that would undermine his efforts to reduce long-term interest rates and speed growth, including the rebound in vehicle sales and housing, said Nathan Sheets, the Fed’s top international economist from 2007-11.
“If long rates rise because of a misunderstanding of the Fed policy path, that is something that is worrisome and that is something they want to clarify,” said Sheets, now global head of international economics at Citigroup Inc. in New York. “Lower rates are absolutely supporting the recovery and stimulating the housing market, autos anddurable goods.”
Several Federal Open Market Committee participants have strayed from Bernanke’s line during the past year. Richard Fisher, president of the Federal Reserve Bank of Dallas, said he saw no need for more stimulus on Aug. 8, about a month before the central bank started a third round of quantitative easing.
“We keep applying what I call monetary Ritalin to the system,” Fisher said. “We all know there’s a risk of overprescribing.”
Philadelphia Fed President Charles Plosser said on Aug. 30 that the potential disadvantages of additional securities purchases outweighed the benefits.
“Increasing accommodation creates risks, and we need to balance those,” he said in an interview with CNBC at the Fed symposium in Jackson Hole, Wyoming.
Plosser, Fisher and Richmond Fed President Jeffrey Lacker are the most “hawkish” Federal Open Market Committee participants, calling for a comparatively aggressive approach to fighting inflation, and aren’t “signals” for future committee action, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.
The Fed chairman’s speeches last year, while temporarily reducing bond yields, weren’t enough to counteract speeches by his policymaking colleagues, who boosted 10-year yields by 0.11 percentage point when their enthusiasm for stimulus fell short of investor expectations, according to Macroeconomic Advisers.
“Last year’s speeches tended to be interpreted as more hawkish than expected,” the St. Louis-based company said in a March 8 report.
St. Louis Fed President James Bullard in 14 speeches last year buoyed yields by 0.07 percentage point, the most of any Federal Open Market Committee participant, the research firm said. Bullard was the first Fed official in 2010 to call for a second round of asset purchases, which ran from November 2010 until June 2011.
Bullard, who votes this year, has said the central bank should reduce the pace of bond buying if unemployment declines or economic growth accelerates, a view shared by Fisher and Plosser. The unemployment rate fell to 7.7 percent in February from 7.9 percent the previous month, and gross domestic product grew 0.1 percent in the fourth quarter after a 3.1 percent rise in the third.
Investors may give too much weight to the regional Fed presidents’ doubts about bond buying while underestimating Bernanke’s clout on the Federal Open Market Committee, said Antulio Bomfim, a senior managing director at Macroeconomic Advisers and a former Fed economist.
The seven Fed governors tend to endorse the committee’s statement as a block, Bomfim said. A Fed governor hasn’t dissented since 2005, when Mark Olson dissented from a decision to increase the benchmark interest rate after Hurricane Katrina struck the Gulf Coast.
Business, Pages 25 on 03/20/2013