Tuesday, October 23 07:20:56
The U.S. Federal Reserve opens a two-day meeting today, and policymakers are expected to stick with the program of monetary easing begun just six weeks ago. Too little has changed in the interim for the Fed to either ramp up or taper off its monthly purchases of $40 billion of mortgage-backed securities, economists say, or to change its guidance that rates will likely remain ultra-low through at least mid-2015. With the outcome of the U.S. presidential election uncertain, policymakers are likely to want to continue to assess both the economic and fiscal policy outlook, as well as the effectiveness of the new monetary stimulus.
With policy on autopilot for now, Fed Chairman Ben Bernanke and colleagues may focus their discussion on two potential changes to the central bank's communication strategy. The policy-setting Federal Open Market Committee is expected to announce its decision at around 2:15 p.m. (1815 GMT) on Wednesday. Here is an overview of the communications steps the Fed is weighing:
Policymakers have been discussing the possibility of linking Fed policy more explicitly to economic factors, rather than linking its low-rate policy to a date on the calendar. The Fed took a half-step in that direction last month, saying it would continue asset purchases unless the labor market improves substantially, but it stopped short of defining what it would see as substantial improvement. Using numerical thresholds as markers for policy is an approach long touted by Chicago Federal Reserve Bank President Charles Evans, who has argued the Fed should promise low rates until the unemployment rate drops below 7 percent, as long as inflation does not threaten to rise about 3 percent.
At last month's meeting, most policymakers agreed that using numerical thresholds for labor market conditions or inflation could be useful, minutes show. Since then two other top Fed officials -- Minneapolis Fed President Narayana Kocherlakota and San Francisco Fed President John Williams -- have publicly floated their own formulas. Kocherlakota wants to keep rates low until unemployment reaches a more normal 5.5 percent rate, as long as inflation does not breach 2.25 percent. Williams told Reuters in an interview that he would favor low rates until unemployment falls somewhat below 7 percent but not as low as 5.5 percent, as long as inflation does not top 2.5 percent.
The range of views illustrates one roadblock to adopting thresholds: the difficulty of winning agreement on the appropriate levels. Policymakers are also worried that thresholds could be wrongly interpreted as triggers necessitating policy change regardless of other factors, or as targets for long-term policy. Minutes from the last meeting said participants felt "further work would be needed to address the related communications challenges."
Officials plan a "broad discussion" of the feasibility and desirability of coming up with a collective Fed view on the economy and monetary policy. A consensus forecast has the potential of capturing the policymaking committee's "center of gravity" -- thereby reducing uncertainty about where the Fed stands. This can sometimes be hard to figure out. There are 19 policymakers -- seven members of the Washington-based Board, and the presidents of each of the 12 regional Fed banks -- and currently they each provide individual forecasts. Financial markets tend to focus on the "central tendency" of policymakers' forecasts, which drops the three highest and three lowest projections for any given economic variable. ( C) Reuters