Fed’s Dudley: Too soon to say economy out of danger

SYRACUSE, New York,. Thu Apr 12, 2012 – The disappointing performance of the U.S. labor market in March shows it is too early to conclude the economy is out of the woods, despite months of encouraging economic data, New York Federal Reserve Bank president William Dudley said on Thursday.

The Fed is gathering more data to determine whether last month’s non-farm payrolls report, which showed the economy added way fewer jobs than expected, was just a weather-related setback or a sign the recovery is losing momentum again, Dudley said.

An influential voting member of the U.S. central bank’s monetary policy committee, Dudley appeared to leave the door open to additional stimulus measures as he noted that the economic data also “looked brighter at this point in 2010 and again in 2011, only to fade later in those years.”

Signs that the economic recovery was losing steam have encouraged the Federal Reserve to launch in the past few years two rounds of monetary stimulus measures known as quantitative easing. Bets on a third round have again increased following the latest jobs report.

“The somewhat softer March labor market report that was released last Friday may reflect the earlier positive influence of the mild weather on job creation in January and February, although other less sanguine interpretations are also plausible,” Dudley said in prepared remarks to be delivered at a conference in Syracuse, New York.

On Thursday, the Fed’s vice chair Janet Yellen said further monetary easing could be warranted if the economy proceeds at a slower-than-expected pace.

Federal Reserve seen indicating no rate hikes until 2014

WASHINGTON – The Federal Reserve opened a two-day meeting on Tuesday that is expected to end with a signal that interest rates will be held near zero into 2014.

Outside of words, however, the central bank appears unlikely to take any action to prop up the economy, although some officials have raised the prospect that more bond purchases will be needed.

For the first time, the Fed will release policymaker projections for the path of the benchmark federal funds rates at the conclusion of the meeting on Wednesday. It will also lay out views on when the first rate hike should occur.

Also, in what would be a historic shift, it may also announce an agreed target for inflation, which would likely be in the 1.7 percent to 2 percent that the majority of Fed officials have already said is desirable.

Fed officials began their meeting at 10 a.m., a Fed spokesperson said. A policy statement is due at 12:30 p.m. on Wednesday, and that will be followed by a news conference by Fed Chairman Ben Bernanke and the publication of policymakers’ quarterly forecasts.

The central bank cut the federal funds rate to near zero in December 2008 and has bought $2.3 trillion in bonds in a further effort to spur stronger economic growth.

The U.S. economy strengthened toward the end of last year, and the unemployment rate dropped to a near three-year low of 8.5 percent in December.

FDIC releases bank financial shock test proposal

WASHINGTON ― Bank regulators on Tuesday voted to release a proposal for how banks with more than $10 billion in assets should conduct stress tests annually to determine whether they can withstand a financial shock.

The tests are required by the 2010 Dodd-Frank financial oversight law, which has established stress tests as a key component of how regulators will gauge the health of the banking industry.

The largest U.S. banks are facing several regulatory tests of their operations.

The Federal Reserve, for instance, has to establish stress tests for bank holding companies with more than $50 billion in assets and the agency released a proposal for this requirement in December.

The Fed is also currently putting banks with more than $50 billion in assets through separate tests to gauge whether they have enough capital. The results of these tests are expected in March.

Regulators have said they will attempt to coordinate the different testing requirements as much as possible.

On Tuesday the board of the Federal Deposit Insurance Corp voted to 4 to 0 to approve the proposal for banks with more than $10 billion in assets. It will be out for 60 days for public comments.

“It’s an important forward looking mechanism for institutions to identify risks and act accordingly,” acting FDIC Chairman Martin Gruenberg said.

FDIC staff said it is not yet clear whether the first of these tests will be held in 2012 or 2013. The timing will depend on the comments received and when the Fed finalizes its December proposal for stress testing the largest banks.

The tests are intended to give banks and regulators a better idea of whether banks can weather a crisis and what steps they may have to take to strengthen their operations.

Under Tuesday’s proposal, regulators each year would provide banks with stress scenarios in November. The banks would run the tests and report back to regulators in January.

Fed should keep easy policy to boost economy: Evans

LAKE FOREST, Ill. ― The U.S. Federal Reserve should stick to its super-easy monetary policy to fight unemployment and spur a “painstakingly slow” economic recovery, even if doing so pushes inflation temporarily higher, a top Fed official said on Wednesday.

“There is a natural tendency for policymakers to pull back on accommodation too early before the real rate of interest has fallen to low enough levels,” Chicago Fed President Charles Evans said in an address to a business group. “It is essential that the Fed clearly commit to a policy action that is measurable against our goals.”

Jeffrey Lacker, president of the Richmond Fed and an inflation hawk, also touted the benefits of clear communications in an interview with CNBC.

However, unlike Evans, he said it would not be appropriate for the Fed to set a numerical target for unemployment.

Fed policymakers meeting on Jan. 24-25 will debate a statement on their longer-run policy goals and could go so far as to set an inflation target.

Last week, the president of the St. Louis Fed Bank, James Bullard, told Bloomberg Radio that agreement to begin inflation targeting was near. “We are getting closer to being able to make a committee-wide statement about these longer-term policy issues,” he said.

Evans wants the central bank to keep interest rates near zero until either unemployment falls below 7 percent or inflation rises above 3 percent. He said that a prolonged period of low rates will likely help the economy and is unlikely to result in higher-than-normal inflation.

Unemployment registered 8.5 percent in December. Despite a recent improvement in economic growth, Evans said, inflation will probably fall to 1.8 percent this year and to near 1.5 percent in 2013 and 2014, below the 2 percent level the Fed views as healthy.

Lacker said he was not too worried that inflation would exceed the Fed’s comfort range this year.

Evans said that inflation at around two percent seemed to be tolerable to a majority of policymakers currently but added: “I think clarifying that would be very helpful.”

Federal Reserve Bank’s Bullard says inflation targeting near: report

ST. LOUIS ― Central bankers are approaching a deal to set an explicit inflation target, a top Federal Reserve official said, part of a campaign to boost the economy by guiding expectations on interest rate policy.

“We are very close to having inflation targeting in the U.S.,” James Bullard, president of the St. Louis Federal Reserve Bank, told Bloomberg Radio in an interview on Thursday. A story of his remarks was posted to Bloomberg’s website on Friday.

“We are getting closer to being able to make a committee-wide statement about these longer-term policy goal issues,” Bullard said.

Since the 2007-2009 recession, the Fed has adopted new communication strategies to improve transparency and support growth by making clear that borrowing costs will be held low for an extended period.

Expectations of low interest rates can encourage investors to buy higher-yielding assets like company shares, providing the companies with more capital. Similarly, banks could be pushed to boost their own earnings by lending more money.

In the last four policy meetings, the Fed has said it will likely hold interest rates at ultra-low levels until at least mid-2013.

Minutes of its most recent meeting in December showed policymakers plan to begin publishing their forecasts for rates. It also showed they debated a statement on their longer-term goals and policy strategies. Officials are set to resume their discussion at their next policy meeting on Jan. 24-25.

Providing an explicit inflation target could help ease concerns that the Fed might take its eye off inflation in its effort to spur stronger growth. In addition, if inflation looks unlikely to breach the Fed target anytime soon, investors can count on the Fed holding open the monetary spigot.Individual forecasts from Fed policymakers have shown most aim to keep inflation in a 1.7 percent to 2 percent range, but an explicit target that they all agree on could give the public and financial markets a clearer prism to gauge how the central bank might respond to incoming data.

According to Bloomberg, Bullard said a Fed statement of longer-run goals “would name a target but it would also reiterate things we have said over the years about how keeping inflation low and stable contributes to great economic performance over all.”

Fed must act now to boost economy, Evans says to college group

MUNCIE, Ind. ― The Federal Reserve must take immediate action to inject new life into a moribund U.S. recovery, or risk letting the nation settle into a permanently lower growth path, a top Fed official said on Monday.

“There is simply too much at stake for us to be excessively complacent while the economy is in such dire shape,” Chicago Fed President Charles Evans said in remarks prepared for delivery to the Ball State University Center for Business and Economic Research. “It is imperative to undertake action now.”

Evans, known for his dovish views on inflation, was the only Fed policy maker to dissent last month on the decision to leave monetary policy unchanged. Then, as today, he called for further easing to boost the recovery.

The U.S. central bank has “clearly” missed on its mandate to foster maximum employment and is in danger of undershooting its 2 percent inflation goal for the foreseeable future, Evans said.

Without new monetary stimulus, Evans warned, the U.S. could become mired in a 1930s-like Depression, impairing economic growth permanently as the skills of the unemployed atrophy and businesses defer new investment.

To avoid such a scenario, Evans argued, the Fed should promise to keep interest rates near zero as long as unemployment remains “somewhat above its natural rate,” so long as inflation does not threaten to rise above 3 percent.

While 3-percent inflation may sound “shocking,” he said, research shows that central banks should fight liquidity traps by allowing inflation to run above target over the medium term.

Since high U.S. unemployment is probably due to the effect of a liquidity trap rather than a structural shift in the economy, Evans said, added monetary stimulus is justified.

And if, he said, it turns out that the real problem was indeed structural and easier policy sparks a rise in inflation, the Fed can simply tighten policy before it threatens to reach the hyperinflationary levels of the 1970s.

“We would also know that we had made our best effort,” he said.

Federal Reserve’s Yellen sees scope for further easing

SAN FRANCISCO ― Janet Yellen, the Federal Reserve’s influential vice chair, said on Tuesday the U.S. central bank has room to ease monetary policy further, possibly by providing more information on the path of interest rates.

A second top official, Atlanta Federal Reserve Bank President Dennis Lockhart, said he sees a benefit in providing more information on the policy assumptions underlying Fed forecasts. He made clear, however, that he believes the current policy stance is appropriate.

With its usual economic lever of interest rates already pressed close to zero and its balance sheet triple the size of its pre-crisis norm, the central bank has been considering how it can better use communications as a policy tool.

The Fed has been debating for months ways to provide more clarity on when it might eventually tighten monetary policy, although officials have differed on how best to proceed.

Yellen said turmoil in financial markets stemming from both Europe’s banking crisis and general uncertainty about the outlook had increased the risks to the global economy, and that the Fed could offer additional support to U.S. growth.

“The scope remains to provide additional accommodation through enhanced guidance on the path of the federal funds rate or through additional purchases of long-term financial assets,” she told a conference sponsored by the San Francisco Federal Reserve Bank.

A number of communications shifts are being discussed, including a controversial proposal from the Chicago Fed president to allow for temporarily higher inflation. Officials are also considering offering explicit forecasts for the overnight federal funds rate.

The deputy governor of Sweden’s central bank, Lars Svensson, urged the Fed to begin providing forecasts for short-term rates as a way to push borrowing costs lower.

“Publishing a policy-rate path would be the most direct way to affect interest-rate expectations, especially since central banks should have better information about their intentions than anyone else,” he told the San Francisco Fed conference.

Bernanke at public forum: Fed focused ‘intently’ on job creation

FORT BLISS, Texas ― Spurring stronger growth and more robust job creation in the weak recovery are top priorities for the Federal Reserve, Chairman Ben Bernanke told a military audience at a rare public forum on Thursday.

“For a lot of people, I know, it doesn’t feel like the recession ever ended,” Bernanke said in remarks before a town hall-style meeting at which he fielded questions from an audience of 175 military personnel and family members.

Two of the Fed’s harshest critics are Texans and Republican candidates for president — Governor Rick Perry and Representative Ron Paul. Bernanke, who met troops returning from Iraq at 2:45 in the morning, used the setting to defend the central bank’s aggressive policies to promote growth and rebut charges it was recklessly spending government money.

Bernanke said the 9 percent jobless rate and record numbers of long-term unemployed Americans are serious problems preoccupying policymakers.

“We at the Federal Reserve have been focusing intently on supporting job creation. Supporting job creation is half of our marching orders, so to speak,” he said.

The Fed’s other job is to keep inflation in check. Bernanke said inflation should moderate and remain close to the Fed’s preferred level of 2 percent or a bit less for the foreseeable future.

Bernanke defended aggressive Fed policies against critics who charge the U.S. central bank has recklessly printed money without regard for the dangers of inflation or a weaker dollar.

“It is important to understand that this type of activity isn’t the same as government spending,” he said.

Public appearances by a Fed chairman are rare. Bernanke’s second-ever town-hall meeting — the last was in July 2009 — likely reflects a desire to counter critics from both political parties.

At Fort Bliss, most members of the audience were dressed in olive camouflage fatigues. Bernanke’s remarks were punctuated on occasion by the fussing and chattering of young children.

Republicans have focused on attacking the Fed’s extensive easy money policies, saying the central bank has failed to revive the economy despite cutting interest rates to near zero and buying $2.3 trillion in bonds. Some have warned the Fed against taking actions best left to fiscal policymakers.

Perry has equated the Fed’s bond buying with treason and suggested Texans might “treat him pretty ugly” if he ever went to the Lone Star State. Paul, a long-time advocate of returning to pegging the value of the dollar to gold or silver, wants to abolish the Fed.

Democrats have charged that the Fed has implemented policies benefiting Wall Street while disregarding the economic struggles of ordinary Americans. Some argue Fed policymakers should be subject to greater accountability.

Bullard: Fedederal Reserve will act if economy weakens further

ST. LOUIS ― The Federal Reserve will act if the economy weakens further and has the tools to do so, a top Fed official said on Friday.

St. Louis Fed President James Bullard said he expects the economy to grow modestly over the next year — though the sluggish pace leaves it vulnerable to shocks.

“Should economic performance deteriorate, monetary policy will respond,” Bullard said, according to slides of a presentation he was scheduled to make . “The Fed is not now, or ever, ‘out of ammunition’.”

With interest rates near zero, Bullard said, the Fed can support the economy through inflation and inflation expectations and asset purchases are a “potent tool.”

Dealers polled by Reuters earlier this month gave a median chance of 32 percent that the Fed will embark on a third round of quantitative easing.

The Fed said last week it plans to buy $400 billion of longer-term Treasuries and sell the same amount of shorter-term Treasuries by the end of June 2012, in an effort to lower longer-term borrowing costs.

It also said it would support the mortgage market by reinvesting principal payments from its mortgage-related debt into mortgage-backed securities.

Bullard said policy should aim to be more rules-based than it has been since the crisis hit and return to a meeting-by-meeting approach by the Federal Open Market Committee.

“The policy approach over the last several years, with announcements of large dollar amounts, fixed end dates, and rapidly changing tactics, seems fairly discretionary,” he said.

“Returning to a more rules-based approach may provide needed stability to the U.S. macroeconomy.”

Bullard repeated his view that promising to keep rates low for a specific period of time has a number of drawbacks, including the possibility of its hurting Fed credibility.

He also warned against tying monetary policy to the unemployment rate, as Chicago Fed President Charles Evans has suggested.

Unemployment rates have a “checkered history” in advanced economies over the last several decades, he said. In Europe over the last 30 years, for example, the unemployment rose and stayed high.

“If such an outcome happened in the U.S. and monetary policy was explicitly tied to unemployment outcomes, monetary policy could be pulled off course for a generation.”

Market expects Operation Twist in September from Federal Reserve

NEW YORK ― Bond investors see Federal Reserve action to boost the flagging U.S. economy as practically a done deal after Friday’s dismal jobs report.

Government data showing the economy failed to create new jobs last month heightened speculation the Fed will launch a program this month to pump money into the economy by pushing down long-term borrowing rates.

The move, known to some in financial markets as Operation Twist, would probably involve the Fed selling shorter-dated Treasuries it holds its balance sheet and buying longer-dated bonds.

The Treasury market appeared to price in greater chances of this after the jobs report, with 30-year long bonds surging 3 points in price.

“Following today’s worse-than-expected jobs report, we now look for the Federal Open Market Committee to announce a lengthening of the average maturity of the Fed’s balance sheet at the September 20-21 meeting,” Jan Hatzius, chief U.S. economist at Goldman Sachs in New York, wrote in a note to clients.

Goldman’s call echoed in the Treasury market on Friday, with a flattening of the yield curve as traders increased positions in longer-dated bonds at the expense of shorter maturities.

Some analysts said even without the dismal jobs data the Fed’s move would have been inevitable.

“We thought they were going to do it in August,” said Ira Jersey, interest-rate strategist at Credit Suisse in New York.” “But I guess with some of the operational issues it raises they wanted to wait.”

Operation Twist would take some fancy footwork, Jersey said, with the New York Fed likely having to hold two auctions in a single day.

In the first, the Fed would sell shorter dated securities. It would then hold a second to buy bonds of longer maturities from primary dealers. Both auctions would settle the following day.

Hatzius, at Goldman, said such an operation would ultimately remove so much longer-dated debt from the market its effect would be almost as big as the Fed’s last major easing program.

Referred to by many as QE2, the Fed bought $600 billion in Treasuries.

“This type of operation would be the equivalent of 80-90 percent of QE2 in terms of duration risk removed from the market,” Hatzius said.