Wednesday, March 30, 2011

A comment on Regional Fed Talk

by Calculated Risk on 3/30/2011 02:18:00 PM

Much has been made about recent comments by St Louis Fed President James Bullard and Philly Fed President Charles Plosser. Kansas City Fed president Thomas Hoenig added his voice today: Fed should head for the exit, Hoenig says

A few comments:
• When Plosser gave his EXIT speech last week, he started by saying: "As always, and perhaps particularly so today, the views I express are my own and do not necessarily represent those of the Federal Reserve System or my colleagues on the Federal Open Market Committee." Notice that he emphasized these are his views.

• Tim Duy wrote today: Fed Watch: Running the Fed Like an Economics Department

It seems to me that the Fed lacks a coherent communication strategy – there is no willingness on the part of the leadership to enforce talking points. As a consequence, there is enormous pointless chatter from Fed officials that might be interesting in some sense, but provide misleading guidance about policy direction. Recent talk about scaling back the size of the large scale asset program, for instance. Almost certainly not going to happen – so why talk about it? Sadly, it appears to be an almost deliberate effort to create uncertainty among market participants at a time when the opposite is so important.
A key European analyst wrote to his clients today:
Professor Bernanke likes to allow his students to roam the campus and say what they think. This collegiate approach leads to vibrant debate, but debate that may have previously only occurred behind the closed doors of the FOMC.
And that is the point: these comments are the opinions of a few regional presidents - some non-voting - and do not represent the views of the majority on the FOMC.

• The "big three", Fed Chairman Bernanke, Vice Chair Janet Yellen, and NY Fed President William Dudley will all speak over the next two weeks, starting with Dudley this Friday, Bernanke on April 4th, and Yellen on April 11th. I expect they will speak with one voice and stand behind the current QE2 policy stance and the "exceptionally low levels for the federal funds rate for an extended period" guidance. I also expect they will also argue that the increase in inflation is transitory.

Although I read all the regional Fed speeches, I'm not sure why some market participants have been paying closer attention to certain speeches. Perhaps they are unaware of Professor Bernanke's "collegiate approach"!

I believe the current policy will continue as planned.