OLD Media Moves

Looking at Federal Reserve policy

January 28, 2013

Posted by Liz Hester

The New York Times had an interesting story on Sunday about the Federal Reserve and the debate going internally about what to do once the economy starts doing better. Here’s the story:

The Federal Reserve has left little doubt about its plans for the next few months, and thus little mystery about the statement it will release Wednesday after the latest meeting of its policy-making committee. The economy remains weak. The Fed will keep buying bonds to hold down borrowing costs.

Inside the central bank, however, debate is once again shifting from whether the Fed should do more to stimulate the economy to when it should start doing less.

Proponents of strong action to reduce unemployment won a series of victories last year, culminating in December when the Fed announced that it would hold short-term interest rates near zero at least until the unemployment rate fell below 6.5 percent. The rate was 7.8 percent in December.

To accelerate that process, the Fed also said it would increase its holdings of Treasury securities and mortgage-backed securities by $85 billion each month until it sees clear signs of strength in the job market.

And according to Bloomberg, the jobless rate is still too high for the Federal Reserve to change its policy right now.

The job market in the U.S. probably kept making headway in January even in the face of Washington’s budget battles, economists said before reports this week.

Employers added 160,000 workers to payrolls in January after a 155,000 December increase, according to the median of 67 forecast in a Bloomberg survey before a Feb. 1 Labor Department report. The average monthly gain over the past two years was 153,000. Other data this week may show manufacturing is stabilizing, housing is improving and consumers are spending.

Sustained gains in hiring are giving incomes a lift, cushioning workers from the sting of higher payroll taxes. Nonetheless, bigger employment increases are needed to drive down a jobless rate that Federal Reserve officials, who meet this week for the first time this year, say is too high.

The Wall Street Journal points out that not everyone agrees with the Fed that they should continue to buy bonds.

Not all Fed officials agree with the stance. That means arguments are likely to surface at Fed policy meetings about how long to continue buying bonds. Signs of this tension emerged in minutes of the Fed’s December meeting that showed some officials favored ending the bond-buying programs by midyear or sooner, while others thought they should probably continue through this year.

Many Fed officials have been encouraged by signs of an improving economic outlook after a sluggish fourth quarter. Interest-rate-sensitive sectors like housing and autos are turning up, a sign that the Fed’s low-interest-rate policies might be having their intended impact. But they also are wary of projecting a turn toward stronger growth after several false starts in recent years. “Every time economic growth appears to be picking up steam, something happens that brings it back down,” Mr. Williams said.

Economic factors aren’t the only ones Fed officials are considering as they debate how long to buy bonds. Some also are pondering the unknown effects of the programs on the stability of the financial system, including the potential for another financial crisis.

“We must not ignore the possibility that the low-interest rate-policy may be creating incentives that lead to future financial imbalances,” Kansas City Fed President Esther George said in a speech earlier this month. She noted that prices of bonds, agricultural land and high-yield loans are at “historically high levels.” If they fall sharply, it could hurt the economy.

It’s definitely a delicate balance between supporting the economy and over managing it. But I’m sure for all the people out of work, any help bringing the unemployment rate will be appreciated.

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