The Federal Reserve’s top officials headed into a pivotal meeting last week divided over whether to begin withdrawing its extraordinary stimulus of the American economy -- and decided to leave it in place. But early remarks from key players over the weekend could hint at the beginnings of a consensus to finally pull the plug.
The first Fed officials to speak were the heads of the reserve banks of San Francisco, St. Louis and Richmond. They are among the 12 regional bank presidents who, along with the Washington-based board of governors, make up the Fed's top brass and steer the ship of the nation's economy.
The officials are led by Fed Chair Janet Yellen, but everyone weighs in. Before making a change in policy -- especially such a major one as raising the target interest rate for the first time in nearly a decade -- Yellen has to forge a consensus among her colleagues.
Taken together, the views of the three officials who spoke over the weekend span almost the entire spectrum of Fed philosophy, yet their public statements hit remarkably similar notes.
The central bank’s top brass has repeatedly and explicitly signaled that it expects to raise its benchmark interest rate this year. The Fed slashed rates to zero during the darkest days of the financial crisis and has kept them there ever since in hopes of fostering a stronger recovery.
With the unemployment rate at 5.1 percent -- nearly half the peak following the recession -- many analysts had believed the Fed would finally make the move at its meeting last week. But it held off, citing little fear of the sudden spike in prices or wages that low interest rates can stir up but plenty to worry about in the global economy. (Cough, China, cough.)
The question now is: If not September, when? The Fed meets two more times this year, in October and December. Is the Fed still willing to end the era of easy money before saying sayonara to 2015?
Richmond Fed President Jeffrey Lacker is one of the most outspoken opponents of the Fed’s crisis-era stimulus and the lone dissenter from the decision to keep its rate at zero last week. St. Louis Fed President James Bullard is a swing voter who has warned about the dangers of phasing out stimulus too quickly but more recently has argued in favor of a rate hike. Meanwhile, San Francisco Fed President John Williams has been a staunch supporter of easy money.
In the parlance of Fedwatchers, they range in views from hawk to dove. Yet the answer from all three to whether the central bank should raise rates this year was as close to a definitive yes as an economist will likely ever provide.
First and foremost, they pointed to the unemployment rate as well as a grab bag of other factors, including consumer spending and housing. All three painted a picture of a U.S. recovery that is chugging merrily along, albeit still not firing on all cylinders. So if America is no longer in crisis, why is the Fed still deploying what was intended to be an emergency stimulus?
Lacker: This expansion has been disappointing by some measures, when compared to historical averages. Nevertheless, U.S. economic conditions have improved quite significantly over the last six years, all things considered. It’s time to recognize the substantial progress that has been achieved and align rates accordingly.
Bullard: Why do the Committee’s policy settings remain so far from normal when the objectives have essentially been met? The Committee has not, in my view, provided a satisfactory answer to this question.
Williams: It’s important to remember that we’re in a very different place now than when we first instituted extremely accommodative policy.
Next, they concluded that the risk from China’s slowing growth and the subsequent turmoil in financial markets was relatively small. How to interpret those events was one of the key questions in the Fed’s meeting last week, and it seems like officials may be settling on a narrative. Williams described some of the commentary over the state of affairs in the world’s second-largest economy as “downright apocalyptic.” In an earlier speech, which he cited in his public statement over the weekend, Lacker concluded the turmoil had “limited implications” for monetary policy. Bullard said the Fed itself was contributing to global market uncertainty.
And finally, all three emphasized that though the Fed’s first rate hike has become fraught with significance, it will actually be quite small. The historical norm for the Fed’s target rate is 4 percent. A rate hike tomorrow would bring it from from zero to 0.25 percent, meaning that the central bank’s stance would still be feeding plenty of stimulus into the economy. In other words, even if the Fed does less, it will be still be doing more than it has at almost any other period in America’s history.
Lacker: Even after a quarter-point increase, interest rates would remain exceptionally low, providing ample support for economic growth.
Bullard: Once normalization begins, policy will remain extremely accommodative through the medium term.
Williams: “An earlier start to raising rates would allow us to engineer a smoother, more gradual process of policy normalization. That would give us space to fine-tune our responses to react to economic conditions.”
Expect to hear from more Fed officials over the next two weeks, including a major speech by Yellen on Thursday. Despite these early notes of agreement, documents from the Fed's meeting last week show the debate is still raging over what to do next. Four officials believe the central bank should not raise rates until next year -- one more than during its previous meeting. Meanwhile, five seemed to support hiking as soon as next month.
But many of those differences of opinion are well known. More important will be new convergences. The more people singing the same tune, the more likely it will be that 2015 will mark the end of the old one.