Tag: monetary policy
Fed-Audit Idea Gains Steam In Congress, Though Details Scant

Fed-Audit Idea Gains Steam In Congress, Though Details Scant

By Kevin G. Hall, McClatchy Washington Bureau

WASHINGTON — Who audits the biggest bank of them all?

Once dismissed as a crackpot cause, the idea of a complete and real-time audit of the Federal Reserve is gaining support in Congress.

Senator Rand Paul, a Kentucky Republican with presidential aspirations, introduced legislation earlier this month to audit the Fed. The list of co-sponsors quickly jumped to 29. That’s catching up with the House of Representatives, which passed the Federal Reserve Transparency Act late last year by 327-98, with 89 Democrats joining all but one Republican.

“Any agency or bureau of government that is 100 years old probably needs a good checkup, especially one as powerful as yours,” Rep. Jeb Hensarling, R-Texas, the chairman of the House Financial Services Committee, told new Fed Chair Janet Yellen earlier this month at her first appearance before Congress as the chief of the central bank. “And I remind all, independence and accountability are not mutually exclusive concepts.”

Auditing the Fed has populist roots, particularly among Tea Party conservatives. It’s not clear, however, what exactly an audit would involve.

House and Senate bills to audit the Fed provide no specifics about how it would occur, only that the Government Accountability Office would do it. Hensarling, Paul and Senator Marco Rubio (R-FL) another presidential hopeful who’s called for a Fed audit, refused to comment on how a Fed audit might work.

The Fed already has its books audited by outside firms, publishes its balance sheet weekly, reports many financial transactions in real time, provides minutes of its eight-a-year rate-setting meetings of the Federal Open Market Committee with a three-week lag, and issues a statement the day the meetings end that includes how each member voted and an explanation of any dissenting votes.

“The Fed is subject to a financial-statement audit like public companies would be and like all the major federal departments and agencies are,” said David Walker, a former head of the GAO. “The real issue is whether, and to what extent, they are subject to external audit by GAO as it relates to other types of activities.”

Those other activities include discussions preceding action at Fed policy-making meetings, which historically have been shrouded in secrecy. Transcripts of those deliberations are released to the public on a five-year lag, a period the Fed thinks is long enough to fend off political blowback for decisions made.

And that, apparently, is the area Congress is homing in on. The vague definition of the audit by Paul and others bothers former Fed leaders.

“What he’s talking about is sort of a second opinion. Did the Fed do the right thing about monetary policy,” said Alice Rivlin, who was vice chair of the Fed from 1996 to 1999. “GAO is obviously not the right person to do that. Plenty of other people do opine on whether the Fed did the right thing. That would seem not to serve a very useful purpose. It’s just a way of criticizing the Fed, sounding as though the Fed were somehow not transparent.”

The Fed was given independence a century ago precisely to shelter it from political pressures. Publishing the views of participants during or right after the deliberations is akin to Supreme Court justices tweeting out details of their private deliberations on cases being decided. While the high court provides majority and dissent opinions, details of discussions rarely come out until decades later, when a justice releases his or her personal papers.

“What’s the purpose of this?” asked Laurence Meyer, a prominent economist who was a Fed governor from 1996 to 2002, “The (Fed) board has how many hundred economists and Ph.D.s. And each (Fed) Reserve Bank has 20 or 25. These guys (at GAO) are going to be experts? Give me a break.”

“It’s second-guessing,” he added. “It creates noise in the markets, it creates volatility and there is nothing good about it,” Meyer said. “Monetary policy should be made by experts. People want to criticize the Fed, they should be experts.”

The degree of transparency at the Fed today outpaces that of lawmakers, he suggested. For example, their private conversations on legislation or legislative strategy aren’t subject to any transcripts. Many details of ethics probes are also largely kept from the public.

The Fed has always been an occasional target for criticism, but not since the Great Depression has it been so in the line of congressional fire.

“Historically, it is unusual. But recent history is very different from the past,” said Allan Meltzer, a professor at Carnegie Mellon University in Pittsburgh who’s the author of the acclaimed three-book series A History of the Federal Reserve.

Meltzer is sympathetic to concerns about the Fed undertaking monumental actions with little congressional ability to shape policy. Trillions of dollars in government and mortgage bonds purchased by the Fed to stimulate the sluggish economy are really at the heart of the calls for an audit.

Financial markets are already roiled as the stimulus is being withdrawn, and Meltzer thinks that shrinking the Fed’s holdings in coming years threatens to bring more turmoil.

“What Congress should be concerned about is not how they make the decision, but what they decide and what it does to the American economy,” said Meltzer, suggesting more hearings on Fed decisions. “I’ve read more (Fed) minutes than probably any human alive, and they’re not going to learn anything useful in doing that.”

Photo: Gage Skidmore via Flickr

Fed’s New Chief Yellen: No Change To Policy

Fed’s New Chief Yellen: No Change To Policy

Washington (AFP) – New Federal Reserve chair Janet Yellen said Tuesday that she had no plans to change monetary policy from that mapped out by her predecessor Ben Bernanke.

In her first comments on the U.S. central bank’s path forward after the took the helm on February 1, Yellen said the Fed would continue to slowly reel in its huge stimulus while keeping a close eye on the labor market, where recovery remains “far from complete.”

“I expect a great deal of continuity in the FOMC’s approach to monetary policy,” she told the Financial Services Committee of the U.S. House of Representatives, referring to the Fed’s policy body, the Federal Open Market Committee.

“I served on the committee as we formulated our current policy strategy and I strongly support that strategy,” she said, according to the prepared text of her testimony.

The hearing is scheduled to begin at 10:00 am EST.

Yellen said the Fed expects the U.S. economy to grow at a “moderate” pace in 2014-2015, with inflation subdued and no significant danger from the turmoil in emerging markets, some of it sparked by the Fed’s own policies of reducing the bond-buying stimulus program.

The recent bouts of volatility around the world “do not pose a substantial risk to the U.S. economic outlook,” she told the panel.

However, in an acknowledgement of the poor job growth numbers of the past two months that appeared to contradict the sharp fall in the unemployment rate, she stressed that the Fed still sees serious problems in the jobs market.

Even at January’s 6.6 percent, the unemployment rate is “still well above” the level that FOMC policymakers think would be a strong and sustainable level.

She stressed that the number of people forced to work part-time because they cannot find a full-time job “remains very high.”

In addition, she said, there is still a large number of people who have been jobless and looking for a job for more than six months.

In December 2012 the Fed set a reference unemployment rate for winding up its quantitative easing stimulus and beginning to tighten monetary policy overall at 6.5 percent, which it expected to be achieved only later in 2014.

But the jobless rate has fallen much faster than expected, from 7.9 percent in January 2013 to the 6.6 percent level hit last month.

At the same time, job creation has not been as strong as hoped, and in the past two months has been strikingly weak.

Economists explain the divergence as representing not people getting jobs but more just dropping out of the market, and so not counted as unemployed.

Yellen’s pointing to the high numbers of long-term unemployed and the high number of those with part-time work suggests the FOMC will not begin tightening, or increase its benchmark interest rate, now at 0-0.25 percent, if the 6.5 percent level is hit soon.

Crossing that threshold “will not automatically prompt an increase in the federal funds rate,” she said.

Instead, that would only indicate that it “had become appropriate” for the FOMC to consider whether overall economic growth would justify a rate hike.

Yellen also stressed that inflation remained tame, while suggesting there was little threat either of deflation.

Although the inflation rate has been a low one percent, far from the FOMC target of two percent, she said that the recent weakness was likely “transitory,” more due to falling prices for crude oil and for non-crude imports.

AFP Photo/Mandel Ngan

Loose Money Will Keep Economy From Sliding Away

(BLOOMBERG) – The Federal Reserve is now the subject of more political controversy than at any point since the beginning of the 1980s.

The debate centers on what the Washington Post calls its “ultra-easy” monetary policy: Is it hurting or helping the economy? Has the Fed already loosened so much that it has used up its ability to stimulate the economy?

It’s a heated debate, but its premise happens to be wrong. We don’t have loose money, and we haven’t during our entire economic slump. A big reason that slump has been so deep and long is that the Fed is keeping money tight: It’s not letting the money supply increase enough to keep current-dollar spending growing at its historical rate.

That view sounds crazy to a lot of people. They look at low interest rates, soaring commodities prices and an expanded money supply, and assume that these are clear indications of easy money. And sometimes these conditions do reflect monetary ease.

But not always. The late great Milton Friedman looked at Japan’s lost decade and grasped that its low interest rates were, counterintuitively, a sign of tight money: The Bank of Japan had choked the life out of the economy by keeping the money supply too low, and that’s what kept interest rates down.

Short-term moves in commodity prices are not reliable evidence of inflation, either. Otherwise we would have to conclude that we have loose money any time Asian consumption of precious metals increases, or there’s a disruption of the oil markets.

As for the money supply, its increase signifies looseness only if the demand for money balances stays constant. If the supply rises but demand rises even faster, then the central bank has, perhaps inadvertently, allowed money to tighten.

A Better Baseline

These are not just theoretical possibilities. The Fed of the early 1930s offers us history’s most disastrous example of extremely tight money, but at the time low interest rates and an expanded monetary base misled central bankers into thinking their policies were loose. By not sufficiently accommodating increased demand for money balances, the Fed allowed nominal spending to collapse.

You can’t figure out whether monetary policy is loose or tight, in short, without picking the right baseline against which to judge it. The baseline that makes the most sense at the moment can be found in the record of the so-called Great Moderation, from 1987 to 2007. During that time, Fed policies kept the size of the economy growing at a fairly stable 5 percent a year in current dollars. (Inflation averaged 2 percent, real growth 3 percent.) That stability, in turn, anchored expectations about how easy it would be to repay nominal debts.

Recession Reaction

By this measure, money was loose during the closing period of the Great Moderation, also known as the housing bubble: Nominal growth in gross domestic product was above trend. Since then, though, money has been tight. In 2008, the recession and the financial panic sent the demand for money balances sharply upward. (In other words, the “velocity” of money — the rate at which it changes hands — dropped.)

The Fed, partly because it was worried that a surge in commodity prices presaged future inflation, didn’t increase the money supply enough to accommodate that demand. Making matters worse, it instituted a policy of paying banks interest on reserves, which discourages lending and money creation.

The results are all around us. Instead of rising, inflation fell, and has stayed low. Nominal GDP fell faster than at any other point in the last six decades. To return to the pre-crisis trendline, nominal GDP would have to grow by more than 5 percent annually for a few years. Neither round of the Fed’s quantitative easing brought us close to that level. In per- capita terms, nominal GDP is actually below where it was at the start of the crisis.

A New Target

When nominal GDP falls below expectations, people find the burden of their nominal debts — such as mortgages — unexpectedly rising. Uncertainty about the economic outlook increases, and makes consumers and businesses more skittish than they otherwise would be.

Economics professor and blogger David Beckworth suggests that the Fed should abandon interest-rate targeting and instead announce that it will do whatever it takes — from further quantitative easing to throwing money out of a helicopter — to restore nominal GDP to trend.

If markets believe the Fed will follow through, expectations of the future path of nominal spending will adjust upward and that should, in turn, increase nominal spending levels right now. Part of that increase would take the form of an uptick in inflation — which markets currently expect to be extremely low for the next decade — but part of it would also be increased economic activity.

Ending the Fed’s tight-money policies need not punish savers, as is often alleged, because a healthy economic recovery should raise real returns. Conservatives are suspicious of any loosening because they think of it as a government intervention in the free market. But they are wrong. A central bank that keeps the supply of money too low is just as interventionist as one that keeps it too high.

There’s a strong case against central banking itself — against, that is, having a government agency with vast discretion over the money supply. But as long as we have one, it ought to set the best policy it can. And as long as we’re debating its conduct, we ought to be asking the right questions.

(Ramesh Ponnuru is a Bloomberg View columnist and a senior editor at National Review. The opinions expressed are his own.)

To contact the author of this article: Ramesh Ponnuru at rponnuru@bloomberg.net.