This has been a strange week in the annals of Federal Reserve communication, as a parade of the central bank’s leaders have come forward to, in effect, offer a corrective to the impressions about the Fed's stimulus policy that financial markets took from the June 19 Fed statement and press conference.
They have resorted, more than usual, to a series of metaphors to capture what the Fed is, and isn’t doing as it weighs pulling back on its bond-buying program. And so, we give you: The week in monetary policy metaphors.
Here’s Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, who spoke Friday in White Sulphur Springs, W.Va. He dusts off the old metaphor that a central banker’s job is to take away the punchbowl (monetary stimulus) just as the party is getting started:
The Federal Reserve is not only leaving the punch bowl in place, we’re continuing to spike the punch, though at a decreasing rate over the next year.
The Chairman’s statement forced financial market participants to reevaluate the likely total amount of securities the Fed would buy under this open-ended purchase plan -- in other words, how much liquor would ultimately be poured into the punch bowl. Market participants also had to reconsider their estimate of when the Federal Reserve would begin to remove the punch bowl by raising interest rates
Atlanta Fed president Dennis Lockhart, at the Kiwanis Club of Marietta, Ga., compared the withdrawal of monetary stimulus with quitting smoking and used a nicotine patch metaphor.
I don't want to be too cute about a serious matter, but to make an analogy, it seems to me the Chairman said we'll use the patch (and use it flexibly), and some in the markets reacted as if he said "cold turkey." In any event, the upshot has been a rise of market volatility, higher long-term interest rates, and a decline in bond and equity prices.
But the most popular metaphor for withdrawing easy Fed money has been about driving. Here’s John Williams, president of the San Francisco Fed.
Overall, if we were in a car, you might say we’re motoring along, but well under the speed limit. The fact that we’re cruising at a moderate speed instead of still stuck in the ditch is due in part to the Federal Reserve’s unprecedented efforts to keep interest rates low. We may not be getting there as fast as we’d like, but we’re definitely moving in the right direction.
And, from last week, Chairman Ben Bernanke
To use the analogy of driving an automobile, any slowing in the pace of purchases will be akin to letting up a bit on the gas pedal as the car picks up speed, not to beginning to apply the brakes.
That wasn’t the only metaphor Bernanke used. There was also this humdinger:
The unemployment rates that are thresholds for ending QE policies, Bernanke said, are “guideposts that tell you how we’re going to be shifting the mix of our tools as we try to land this ship on a, you know, on a — in a smooth way onto the aircraft carrier.”
From what we know of aircraft carrier landings, they usually aren’t very smooth, and the same could be said of the market reaction to the chairman's comments.
But maybe rather than a transportation metaphor, winter clothing is the way to go. That’s the approach adopted by Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, in an April speech.
In making my choice of outerwear, I’m merely responding to the Minnesota weather, which is a force that is — sadly —well beyond my control. The FOMC is in exactly the same position of having to respond to strong forces well beyond its control when making its decisions about the real interest rate. Thus, when I decide what coat to wear, my goal is to keep myself at a temperature that I view as appropriate, given prevailing conditions that I cannot influence. Similarly, when the FOMC decides on a level of the real interest rate, its goal is to keep the macroeconomy at an appropriate “temperature,” given prevailing conditions that it cannot influence.
In 2007, the FOMC had on about the right kind of coat, in the sense that the macroeconomic outlook was broadly consistent with the Committee’s objectives. The fall in TIPS yields over the past six years suggests that the FOMC has, in the language of my metaphor, put on a warmer coat by pushing down on real interest rates. Indeed, some observers have expressed the concern that the FOMC has put on too heavy a parka.
But the truth is that the FOMC’s choice of winter garb is actually insufficient to keep the U.S. economy appropriately warm. After all, the outlook for both employment and prices is too low relative to the FOMC’s goals. Unemployment is currently 7.6 percent and is expected to fall only slowly. At the same time, inflation pressures are muted: Both private sector forecasters and the FOMC expect that PCE inflation will be at or below 2 percent through 2013 and 2014.
The Committee needs to put on some more serious winter gear if it is to get the economy back to the right temperature.
But the longstanding master of the metaphor on the FOMC is Dallas Fed President Richard Fisher, who managed to squeeze both Shakespearean and nautical analogies into a talk earlier this month.
All of which means that despite the mighty efforts of Captain Bernanke and his crew, present company included, we do not know how this play will end. Will “The Grand Experiment” prove an inspiring history, a tragedy or simply a comedy of errors? We will not know for some time. We will not know until the curtain drops on Act V.
I am tempted to end with a slightly adapted, trite reminder that “All the world’s economy is a stage and we policymakers are merely players upon it,” but I shan’t.
Having spent the happiest of my formative years preparing for and attending the U.S. Naval Academy, then paying my way through Harvard sailing oceangoing yachts as a hired hand, I am given to seafaring analogies. Here is how I would summarize our most recent journey:
The current chairman, Ben Bernanke, took the wheel at the Fed just as we sailed into a tempest that nearly capsized our economy. He and his able crew kept the ship of the economy from floundering and navigated it past the rocks of depression and deflation. The Bernanke-led FOMC steered clear of the shoals of economic collapse by jury-rigging the vessel of monetary policy in an unconventional and unprecedented manner. Now the ship of the Fed is in more benign waters and is sailing forward. The question before us is this: Are we moving forward at sufficient speed to allow the Fed to reset our rigging and our sails, eventually going back to a more conventional configuration?
I have advocated that we begin to reef in the sails, beginning with our MBS purchase program.