I have organized myself to email my occasional op ed pieces in the WSJ, FT
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I have copied below two recent pieces dealing with the decision not to
"taper" or end the Fed's Quantitative Easing program in September.
Marty Feldstein
====
Originally Publised in THE FINANCIAL TIMES
September 22, 2013
The Fed is wrong to put off the return to normality
(PDF Version)
The US Federal Reserves decision last week to delay the start of its
so-called tapering has confused investors about the reliability of its
forward guidance. It has also created a trap that will make it difficult to
start the tapering programme in the future unless the Fed changes its basic
approach.
More specifically, Ben Bernanke, the Fed chair, explained that the Federal
Open Market Committee (FOMC) had decided not to reduce its pace of
bond-buying because current economic conditions were not as favourable as
the FOMC members had expected in June. Looking ahead, he said the Fed could
begin tapering later this year if the data confirm our basic outlook.
That may be a difficult test to pass; the FOMCs projections in recent
years have been repeatedly too optimistic. It looks as though they are
repeating the mistake again. At the end of its recent FOMC meeting the Fed
released a summary of the economic projections of the FOMC members the
governors of the Fed and presidents of the 12 regional Federal Reserve
banks. The central tendency of these projections foresees real gross
domestic product growth of 2.0-2.3 per cent for the 12 months starting with
the fourth quarter of 2012.
That would be higher than the US economy has achieved in any of the past
three years. For the first half of 2013 the official annualised GDP growth
number is now only 1.8 per cent, and more than one-third of that growth was
just inventory accumulation. Private estimates for GDP growth in the
current third quarter are at about the same level. To reach the midpoint of
the FOMCs central tendency range for this year as a whole would require
the growth rate to jump to an annualised rate of 3.2 per cent in the fourth
quarter.
Looking further ahead, the FOMC projections call for a growth rate of
between 2.9 per cent and 3.1 per cent in 2014. That forecast is already a
substantial reduction from the range of 2.9 per cent to 3.5 per cent that
the FOMC was predicting less than two months ago. As we get closer to 2014,
the prospects for that year are likely to look weaker again.
As Mr Bernanke noted, the rise in long-term interest rates since May is
likely to depress the pace of residential construction, the strongest
sector in the past year. Consumer spending is likely to remain weak because
real after-tax income per capita is lower now than it was a year ago. A
fall in the household saving rate has helped to sustain consumer spending
but leaves little scope for a further decline in saving to boost future
spending. Making the start of tapering depend on the economy achieving the
Feds optimistic outlook is therefore likely to lead to another decision to
continue the current pace of bond-buying.
It is hard to argue with the Feds approach that its economic policy should
depend on the data. But it is equally hard to reconcile a strategy of
multiyear forward guidance with policies that are sensitive to changes in
month-to-month economic news.
There is a better strategy that would allow the Fed to start tapering in
October and end bond-buying by the middle of 2014. The Fed has stated that
the pace of bond-buying should reflect a balancing of the benefits that the
policy achieves in strengthening employment and growth against the costs
that they impose on the economy. Putting that into practice would justify
indeed require the Fed to begin tapering.
Although the initial burst of bond-buying may have helped to stimulate
demand in 2010 and 2011, the current strategy is now doing very little to
stimulate economic growth and employment. At the same time, continuing to
buy long-term bonds and promising to keep the real short-term rate below
zero even after the economy has returned to full employment have serious
costs. They distort the investment behaviour of individuals and
institutions, driving them to reach for higher yields by taking
inappropriate risks. They lead banks to make riskier loans in order to get
higher returns. The longer this process of abnormally low rates continues,
the more disruptive will be the return to normal conditions.
It would be wise, therefore, for the Fed to shift away from its focus on
short-term data, to recognise that it has achieved as much as monetary
policy can do, and to start at its next meeting on a path to stabilise the
size of its bond portfolio.
The writer, a former chairman of the Council of Economic Advisers, is
professor of economics at Harvard University
Copyright: The Financial Times Limited
Page 2 of 2
9/24/2013
Project Syndicate The Taper Chase
September 2013
By MARTIN FELDSTEIN
Global financial markets were stunned when the US Federal Reserve announced
on September 18 that it was not ready to begin the widely anticipated
reduction in the pace of its quantitative easing (QE) program. Fed
Chairman Ben Bernanke said that the Fed would continue its monthly
purchases of $85 billion of long-term securities. Understanding the reasons
for the Feds unexpected change of plans may help to anticipate what is
coming next.
After Bernanke announced in May that the Fed intended to taper QE,
investors began to expect that some reduction in the pace of asset
purchases might begin in the early fall. As a result, the interest rate on
ten-year Treasury bonds increased by nearly 50 basis points, from 1.66% on
May 1 to 2.13% on at the beginning of June. Bernankes press conference
after the next meeting of the Federal Open Market Committee (FOMC) on June
19 caused a further rise in the ten-year rate, to 2.5% on July 1 and then
to 2.92% just before the Feds September meeting.
In short, the market was clearly expecting that the tapering would begin in
September and that the asset- buying would end in mid-2014. There are at
least three possible reasons why the Fed shifted its actions and policy
guidance so dramatically.
One possibility is that Bernanke and the other FOMC leaders especially
Vice Chair Janet Yellen and New York Fed President Bill Dudley never
intended to start tapering. Their earlier statements sought merely to
reassure FOMC members who wanted to end QE that the leadership was
listening to their arguments and taking them seriously. Doing that
prevented QEs opponents from voting against the majority FOMC position,
something that would suggest policy disarray at the Fed and a lack of
respect for Bernanke. If this explanation is correct, Fed leaders can be
expected to continue with an undiminished program of buying long-term
securities into next year.
A second possible explanation is that Bernanke and other Fed leaders were
indeed anticipating that they would begin tapering QE in September but were
startled at how rapidly long-term rates had risen in response to their
earlier statements. Bernanke spoke about his surprise in this regard at his
June press conference, when rates were up only about 50 basis points. By
September, they were up 125 basis points, to nearly 3%. The markets
obviously were not convinced by Bernankes statements that a slower pace of
asset purchases would still represent an easy-money policy. In this way,
the Fed had already achieved a significant rise in rates without having to
taper QE. Even if the economy were robust, this increase would dampen
housing and other activities that are sensitive to long-term rates.
The third scenario is that economic activity was clearly slowing, with the
future pace of activity therefore vulnerable to even higher interest rates.
The annualized GDP growth rate in the first half of 2013 was just 1.8%, and
final sales were up by only 1.2%. Although there are no official GDP
estimates for the third quarter, private-sector assessments anticipate no
acceleration in growth, putting the economy on a path that will keep this
years output gain at well under 2%. In addition, the Feds preferred
measure of inflation was much lower than its 2% target. The annual price
index for personal consumer expenditure, excluding food and energy, has
been rising for several months at a rate of just 1.2%, increasing the
possibility of a slide into deflation.
Putting all of this together suggests that the Fed is likely to continue
the current pace of QE through the end of this year and into 2014. Although
Bernanke pointed in his September press conference to the possibility that
the tapering might begin before the end of 2013, he conditioned this on the
economy performing up to the FOMCs expectations. If that is interpreted to
mean that the FOMCs members must be satisfied with the rate of real GDP
growth, the Fed is highly unlikely to start tapering QE this year, because
growth would have to accelerate to about 3% in the final quarter.
And yet, while all of this points to continued asset purchases at the
current pace into 2014 (and perhaps beyond), there is one reason why some
small tapering might occur in December: Bernanke is scheduled to retire in
January. Since he introduced the unconventional monetary policies of QE
and forward guidance, he might want to show before he steps down that he
has put the Fed back on a path to conventional policies. But a single step
in that direction would not have a significant impact on the level of
interest rates and the pace of economic growth.
I continue to believe that the benefits of QE are no longer significant and
that the low level of interest rates is driving investors and banks to take
undesirable risks. In these circumstances, the Fed should move swiftly to
end its long-term asset-purchase program.
Martin Feldstein, Professor of Economics at Harvard, was Chairman of
President Ronald Reagan's Council of Economic Advisers and is former
President of the National Bureau for Economic Research.
Copyright: Project Syndicate, 2013.
www.project-syndicate.org
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9/30/2013
Received on Mon Sep 30 2013 - 21:15:01 EDT
