Economic First Look: Fed Presidents Air Their Doubts

 | Jan 05, 2013 | 11:00 AM EST
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  • No Major Economic Releases


  • National Federation of Independent Business (NFIB) Small Business Optimism Index, 7:30 a.m.
  • Jeffrey Lacker, president of the Richmond Fed (voter), speaks, 1:30 p.m.
  • Consumer Credit, 3 p.m.


  • Energy Information Administration Petroleum Status Reserves, 10:30 a.m.


  • Jobless Claims, 8:30 a.m.
  • Esther George, president of the Kansas City Fed (non-voter), speaks, 12:45 p.m.
  • James Bullard, president of the St. Louis Fed (non-voter), speaks, 2 p.m.
  • Narayana Kocherlakota, president of the Minneapolis Fed (non-voter), speaks, 8 p.m.


  • International Trade, 8:30 a.m.
  • Import and Export Prices, 8:30 a.m.
  • Charles Plosser, president of the Philadelphia Fed (non-voter), speaks, 9:30 a.m.
  • Treasury Budget, 2 p.m.

This week is relatively light on economic data, with International Trade being the only top-tier monthly report. These data are a bit dated by this point, as the report covers November. Pair this with import and export prices, due out at the same time, to get a read on international trade figures in real terms.

However, we do have a lot of Federal Reserve speakers. The caveat is that only one of them, Jeffrey Lacker, has a vote on the Federal Open Market Committee. The others, while they don't currently have a vote, do participate in policy discussions, so their views are important.

That said, here's a cheat sheet to the most recent views shared by the committee members speaking this week:

Jeffrey Lacker

Lacker has voted against policy decisions recently. His reasons for dissenting were that he "opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate." So, when we hear or read his speech this week, remember that his views might not be reflective of how other FOMC members might vote -- but those members may share his sentiments, even if they're not officially dissenting.

Here are some highlights from one recent speech.

While maintaining price stability is the responsibility of the Federal Reserve, real economic growth and labor market conditions are affected by many factors beyond the Fed's control. The effects of monetary stimulus on real output and employment often are smaller than is widely thought.

The current supply of bank reserves is sufficient to support economic recovery, and additional asset purchases are likely to have little to no effect on growth.

By attempting to improve labor market conditions through very accommodative monetary policy, the Fed could endanger its record of achieving price stability.

 Esther George

Her most recent speech was on recovery from financial crises. She opines, "The slow nature of this recovery, the limited amount of new lending after more than four years and the continuation of banking issues in some countries may suggest that the actions we took left unresolved problems. In addition, we must consider whether what we are doing is sustainable in the long run or whether it only increases the chance of future crises." This implies she is cautious about expanding the Fed's balance sheet by continued bond purchases and other policy tools.

She voices concern that we still have not addressed "too big to fail" and have not focused on properly aligning risk incentives in the banking industry, hindering, not helping, reforms to prevent future crises. Further, in one of my favorite quotes from her speech, she says, "It is said that regulators come in after the battle is over and shoot the wounded."

Narayana Kocherlakota

In his most recent speech that addressed monetary policy, Kocherlakota notes, "Some observers argue that the Fed has done too much, has been too accommodative. I strongly disagree. These critics are certainly right that the Fed's actions -- tripling its balance sheet and keeping the fed funds rate near zero for years -- are historically unprecedented." He goes on to say, "In order to fulfill its dual mandate of promoting price stability and promoting maximum employment, the FOMC must offset these adverse shocks by making monetary policy more accommodative."

His views now seem quite dovish. But in a 2010 speech, in one of my favorite quotes from Kocherlakota, he questioned the effectiveness of monetary policy: "The Fed does not have the means to transform construction workers into manufacturing workers." He also said, "Finally, in terms of unemployment, I see current and future problems in labor markets that are likely to continue to prove resistant to the tools of monetary policy." It's noteworthy to see such a big change in his stance from two years ago.

James Bullard

In a presentation (PDF) this past fall, Bullard foreshadowed changes in monetary policy communications, particularly regarding the duration of low rate policies. One of Bullard's slides, titled, "The Pessimism Problem" summarizes his view that monetary policy becomes less effective with the Fed's previous position of maintaining low rates with a calendar target, which was then through 2015. In this speech, he outlined what would become the Fed's current stance of targeting low rates as long as unemployment was above 6.5% and inflation lower than 2.5%. These thresholds avoid any implications that the Fed expects a weak economy for at least the next three years, and focuses on goals, not dates.

However, he emphasizes how complex the economy is and that any necessary changes to Fed policies are not as simple as this threshold rule implies. Thus, as investors, we need to remember that Fed policy does not necessarily hinge on breaching these levels. Bullard notes that both unemployment and inflation can be caused by things unrelated to monetary policy. He also reminds us that Fed policy has limits to its effectiveness and the Fed might need to adapt monetary policy to other factors in the economy (like asset price bubbles, for instance).

Charles Plosser

In a recent speech (PDF) describing the ability of monetary policy to affect unemployment as "tenuous at best," Plosser notes:

"Despite these extraordinary efforts by the Fed, our economy remains lackluster -- unemployment remains uncomfortably high and is declining only slowly, economic growth is mediocre, and confidence in the future remains subpar.

Looking at this state of economic affairs, one might conclude that the Fed just hasn't done enough."

He goes on to say the following, dispelling the notion that the Fed "hasn't done enough," at least as far as he is concerned:

"I join many economists who are skeptical that further asset purchases will have much effect on longer-term interest rates. Even if they do, the declines in long rates are likely to have fairly negligible effects on employment or growth at best. On the other hand, I believe the extraordinary policies the Fed has pursued pose substantive longer-term risks: These include moral hazard, future inflation, and loss of institutional credibility."

Regardless of whether this week's Fed speakers have votes, they do have their doubts, expressed either now or in the past, about the Fed's effectiveness in reducing unemployment.

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