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What you should pay attention to in the Fed’s very busy week

Photo by Simon Dawson/Bloomberg

This post has been updated.

The Federal Reserve is in the midst of a 48-hour information overload: four Fed presidents are speechifying, Chair Janet L. Yellen is commencement addressing, Federal Open Market Committee minutes are dropping, and the Senate is confirming. No wonder Wall Street has been so volatile.

Here’s our guide to what you should really be paying attention to.

Stan Fischer’s confirmation vote
The Senate on Wednesday afternoon approved the nomination of the former head of the Bank of Israel and all-around macroeconomic mensch to join the Fed. The move prevents the central bank’s influential board of governors from dwindling to just three members after Jeremy Stein resigns at the end of this month -- the first time the central bank would be in that predicament since its current structure was established. The confirmation also places Fischer at the Fed in time for its next policy-setting meeting in June. He slated to become the vice chairman at the central bank.

The next nominee(s)?
Two more Fed nominees are waiting for Senate confirmation: former Treasury official Lael Brainard and sitting Fed Gov. Jerome Powell, whose term is up for renewal. But even if they are confirmed, the central bank would still be left with two empty seats on the board of governors. On Wednesday, Kansas City Fed President Esther George called for at least one of those vacancies to be filled by a community banker.

"Experience and informed judgment are as important to good policy as academic and theoretical frameworks," she said during a speech in Washington.

Several lawmakers have also called for a community banking voice at the Fed, and Fed Chair Janet Yellen said during testimony on Capital Hill earlier this month that she supports that effort. Bloomberg has reported that the White House is considering two potential candidates: Rebeca Romero Rainey, head of the Centinel Bank of Taos in New Mexico, and Ann Marie Mehlum, former chief executive of Summit Bank in Oregon.

Everything about this speech by New York Fed President William Dudley
He delivered a substantial speech Tuesday that both clearly articulated the dominant view within the Fed over how to interpret the recent slowdown in growth and housing, and he delved into the logistics of the Fed’s return to normal policy. The head of the New York Fed is typically closely aligned with the central bank’s leadership and sometimes acts as its surrogate. So his comments deserve extra weight.

On the economy:

  • Weather, expiration of federal unemployment benefits for long-term jobless and expected drawdown in trade and business investment can be blamed for the stagnant economy during the first quarter.
  • The long-term jobless may be simply unlucky -- rather than permanently unemployable -- and are still important to the labor market.
  • Even after interest rates rise, they may be lower than historical norms because (1) households and businesses save more, (2) an aging population implies lower potential GDP, and (3) banks are required to hold more capital.

On the exit from the Fed's stimulus program:

  • The fact that the Fed is now discussing the specifics of what the exit from unconventional monetary policy would look like is in itself notable. Raising interest rates and shrinking the balance sheet are no longer far-off, abstract ideas like they were in 2011, when officials crafted their “principles” for the process.
  • Stopping the reinvestments might cause investors to assume that rate hikes are imminent. (Flashback to the Taper Tantrum a year ago when the Fed hinted it could start to wind down its bond purchases.) Dudley suggested the central bank wait until after the first rate increase to end the reinvestments.
  • Back in 2011, the Fed thought it would have to sell the massive amount of bonds it acquired while pumping money into the recovery. But Dudley reiterated that the Fed will likely simply let the bonds runoff as they mature instead.
  • The Fed is looking at new tools, such as overnight fixed-rate reverse repos, the interest it pays banks on excess reserves and term deposit accounts to better target interest rates throughout the financial sector -- for banks as well as shadow banks.

FOMC minutes
The central bank's policy-setting arm, the Federal Open Market Committee, hit the ground running during its April meeting: First on the agenda was a detailed debate over the tools it might need when it eventually raises interest rates and shrinks the balance sheet.

According to minutes of the meeting released Wednesday afternoon, the options look very much like the alphabet soup of options that Dudley outlined in his speech: ON RRP (overnight reverse repos), TDF (term deposit facilty) and IOER (interest on excess reserves), among others. The board did not reach any conclusions but directed the staff to keep analyzing its options. Of course, the minutes included this caveat:

"The Committee's discussion of this topic was undertaken as part of prudent planning and did not imply that normalization would necessarily begin sometime soon."

Ben Bernanke's commencement address at Princeton last year
Yes, it is Yellen who actually spoke at New York University's graduation ceremony at Yankee Stadium on Wednesday. Her speech encouraged students to foster their curiosity, listen carefully to others and remember that success is determined more by "grit" than ability.

But we felt also this was an opportune time to revive former Fed chairman Ben Bernanke's hilarious address, "The Ten Suggestions," from a year ago. In retrospect, it was as much a commencement speech as his own benediction, and it began thusly.

I wrote recently to inquire about the status of my leave from the university, and the letter I got back began, "Regrettably, Princeton receives many more qualified applicants for faculty positions than we can accommodate."