Photograph by Jonathan Alcorn/Bloomberg

Charles Evans, president and chief executive officer of the Federal Reserve Bank of Chicago.

With characteristic vigor, Federal Reserve Bank of Chicago President Charles Evans had a message today for skeptics of the central bank’s unprecedented stimulus measures known as quantitative easing.

From auto loans to mortgages and employment, all signs are pointing to the fact that the Fed’s bond buying is working, he said.

“I find it very comforting that the programs we’ve put in place have been showing the more standard transmission mechanism,” Evans told Michael McKee in a Bloomberg Television interview today. “I don’t think it would be appropriate to say: `We haven’t done exactly this before, maybe we shouldn’t do it.”’

The Chicago official, who dissented twice in 2011 in favor of more stimulus, was cautioning against the restraint that some of his colleagues have urged. Even with uncertainties, Fed officials need to “try as hard as we can” to bring unemployment down, he said.

“Is it unusual?” he said. “Yes, but we’re not in a business-as-usual monetary policy situation. The unemployment rate is extremely high still and inflation is low.”

Original post is Evans to Fed Skeptics: QE Working by Political Capital.

Photograph by Andrey Rudakov/Bloomberg

An employee counts U.S. 100 dollar notes and 500 ruble notes, right, at the counter of an OAO Sberbank currency exchange in Moscow, Russia.

Ask Federal Reserve officials about their goals for the U.S. exchange rate, and they will demur. The Fed’s standard response is that the strength or weakness of the dollar is a matter for the U.S. Treasury.

Yet one of the biggest drivers of exchange rates is a nation’s monetary policy. Raise interest rates and global investors will flock to your currency. Cut rates and they flee elsewhere.

Now two researchers from the San Francisco Fed confirm that the Fed’s unconventional large-scale asset purchase programs, known as QE for quantitative easing, push down the value of the dollar when they’re announced.

“Changes in the dollar’s value immediately following surprise policy announcements are comparable before and after the crisis,” wrote Reuven Glick and Sylvain Leduc, in a commentary published today on the San Francisco Fed’s website.  “This suggests that changes in unconventional monetary policy have affected the dollar about as much as changes in the federal funds rate did before the financial crisis.”

The research may bolster the confidence with which central bankers can deploy quantitative easing as they seek to revive an economy with 7.7 percent unemployment. Prior to 2008, the Fed had relied on lowering and raising its target interest rate to guide the economy. Glick and Leduc’s research suggests that QE may be similarly effective.

“One way to measure the effectiveness of unconventional monetary policy tools is through the U.S. dollar exchange rate,” wrote Glick and Leduc, who are both economists at the San Francisco Fed.

“Although the Fed does not target the exchange rate specifically, monetary policy decisions ultimately affect the dollar’s value, which can have important effects on the economy,” they wrote. Their research focuses on the effect of surprise policy announcements and finds that “the greater the surprise, the more the dollar depreciates.”

So how much depreciation? Their research shows that a 1 percentage point easing in long-term Treasury futures rates causes a 3 percentage point decline in the value of the dollar. All else equal, this ought to boost the country’s exports and strengthen the economy.

That’s why Fed Chairman Ben Bernanke says the Fed’s policies — and those of other central banks that have lowered their interest rates and engorged their balance sheets — are justified.

“The advanced industrial economies are currently pursuing appropriately expansionary policies to help support recovery and price stability in their own countries,” Bernanke said in a speech last week in London. “As the modern literature on the Great Depression demonstrates, these policies confer net benefits on the world economy as a whole and should not be confused with zero- or negative-sum policies of trade diversion. In fact, the simultaneous use by several countries of accommodative policy can be mutually reinforcing to the benefit of all.”

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Original post is Fed Doesn’t Target Exchange Rates — But if it Did… by Political Capital.

Photograph by Daniel Acker/Bloomberg

Traders work in the ten-year U.S. Treasury Note options pit at the Chicago Board of Trade.

Federal Reserve watchers such as Michael Feroli at JPMorgan Chase & Co. expect the central bank this week to bulk up its balance sheet again by adding $45 billion dollars of monthly Treasury purchases to its standing program of $40 billion monthly mortgage-backed securities purchases.

Inflation is still slightly below the Fed’s 2 percent goal at 1.7 percent for the year ending October, and the unemployment rate at 7.7 percent in November is far above its 5.2 percent to 6 percent definition of a sufficiently tight labor market.

Wall Street analysts haven’t decided whether to call it Quantitative Easing 4 or Quantitative Easing 3.5.

The real issue, however, is that the Fed’s balance sheet is likely to vault over $3 trillion, compared with a normal size of about $1 trillion. Today, total assets held by the Fed stand at $2.86 trillion.

The bigger the Fed’s holdings get, the less likely they will be able to sell these assets at a rapid pace when it comes time to raise interest rates because they would disrupt financial markets.

If the Fed can’t shrink its balance sheet, it might resort to other tools to mop up the cash it is creating. It could sell term deposits to banks and money market mutual funds. In effect, the Fed could end up looking a lot like a commercial bank. It would be paying interest on deposits to fund a large portfolio of housing bonds.

Marvin Goodfriend, who was a policy adviser at the Richmond Fed and is now an economist at Carnegie Mellon’s Tepper School of Business, points out that support of particular industries is risky for central bank independence. Today, the Fed is financing housing; tomorrow they could be pressured into financing some other segment deemed critical to America’s economic success.

The larger point is that nobody really knows what normal central banking looks like any more. Central bank mandates written by legislatures pay a lot of attention to low inflation, yet price stability isn’t the biggest worry just now. Central banks, including the Bank of England and the Bank of Japan, are doing what they can to boost growth, credit and employment, and may find it hard to step back from a broader mission even though they spent three decades explaining why low inflation should be their first and sometimes only goal.

Original post is Fed Exit Looks Harder w/ New Buying by Political Capital.

Photograph by Scott Eells/Bloomberg

Ben S. Bernanke, chairman of the U.S. Federal Reserve, speaks to the Economic Club of New York on Nov. 20, 2012.

The latest inflation reports tied to consumer spending give Federal Reserve Chairman Ben Bernanke a green light to consider stepping up asset purchases, or quantitative easing.

Today’s Commerce Department report showed that a measure of prices tied to spending advanced 1.7 percent in October from the same month last year, less than the Fed’s long-run goal of 2 percent. Excluding food and energy costs, the price gauge increased 1.6 percent from a year earlier.

“Some Fed members think they should keep easing one way or another unless the” measure of inflation tied to expenditures “rises above 2.5 percent,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

“One thing for certain is that inflation is dead,” Rupkey said. “The slower growth picture right now makes the case for the Fed replacing the expiring $45 billion purchases side of QE Twist with outright purchases of Treasuries, across the curve, when it meets” Dec. 11-12.

The central bank each month is swapping $45 billion in short-term Treasuries for longer-term debt in a program called Operation Twist scheduled to end in December. A number of Fed officials have said monthly purchases of bonds may be expanded next year after Twist ends, according to minutes of their Oct. 23-24 meeting.

Jim O’Sullivan, chief U.S. economist with High Frequency Economics, Ltd. in Valhalla, New York, said today’s benign inflation report may help on that front.

“The tameness in inflation, combined with contained inflation expectations, increases the likelihood that Fed officials will expand QE3 to include Treasuries when Operation Twist concludes at year-end,” he said.

Original post is Bernanke’s Green Light for Easing by Political Capital.

Photograph by Stephen Yang/Bloomberg

William "Bill" C. Dudley, president of the Federal Reserve Bank of New York.

Written with Caroline Salas Gage

A Federal Reserve policy maker added to hints that the central bank will continue Treasury purchases into 2013 when officials gather for their last meeting of this year.

Federal Reserve Bank of New York President William C. Dudley said today that “unacceptably high” joblessness is a key consideration as he considers whether to back additional asset purchases known as quantitative easing.

“The Fed will promote maximum employment and price stability to the greatest extent our tools permit, and we will stay the course,” Dudley said in a speech in New York.

Right now, Fed policy makers are buying $40 billion in mortgage debt each month to give the housing market a lift and cut the unemployment rate from its current 7.9 percent. They’re also pledging to keep the main interest rate near zero through mid-2015.

The Fed also has been swapping $45 billion of short-term Treasuries a month for longer-term debt in a program called Operation Twist, which is scheduled to expire at the end of this year. While that doesn’t add to the Fed’s balance sheet, economists expect that policy makers will replace it with a program that does.

When policy makers last met on Oct. 23-24, a “number” of officials said they may need to expand the monthly bond purchases, according to the minutes of the gathering.

Jan Hatzius, chief economist at Goldman Sachs Group Inc., said today he expects the Fed will decide to increase the pace of balance sheet expansion from $40 billion a month now to about $85 billion a month when policy makers meet next month.

The central bank will probably buy about $85 billion in bonds per month starting in early 2013, San Francisco Fed President John Williams said in a Nov. 14 speech. Williams, who votes on policy this year and was one of the first policy makers to back open-ended buying, said monthly purchases may continue well into the second half of the year.

The decision rests with the Federal Open Market Committee, a 12-member panel led by Chairman Ben Bernanke. It also includes the six other Washington-based Fed governors and five of the 12 presidents of the regional reserve banks. The FOMC next meets Dec. 11-12.

As president of the New York Fed, which conducts the open market operations that actually implement the monetary policy made by the FOMC, Dudley always has a vote. The other 11 reserve banks share the four remaining votes in a rotation.

Dudley said today he’ll “focus on the labor market outlook, not just its current state” in determining whether to add to the Fed’s stimulus. “Although the economy continues to expand, we must grow faster if we are to put all of our jobless workers and idle businesses back to work,” he said.

Original post is Fed Hints at More Bond Buying in ’13 by Political Capital.

Photograph by Richard Drew/AP Photo

Specialist David Pologruto works at his post on the floor of the New York Stock Exchange, as Federal Reserve Chairman Ben Bernanke holds a news conference in Washington.

Mitt Romney called quantitative easing a “sugar high” today in his first public comments about the Federal Reserve’s plan to stimulate the economy.

Speaking to donors in New York City this morning, Romney said his economic policies avoid the need for another round of bond-buying by the central bank.

“We’re not going to have to look for the sugar high that comes with QE3 or QE4 or QE5 or QE6,” he said. ”The real course ahead for America is to encourage the growth of our economy, not just to go out there and print more money.”

The Fed announced yesterday it would buy $40 billion per month in mortgage bonds until the economy improved — the third round of a program known as quantitative easing.

Romney has said he opposes the program because it’s unlikely to improve the economy. He’s also promised to replace Fed Chairman Ben Bernanke when his term expires in January 2014.

“Sugar high” is an unoriginal criticism from the Romney team. Pollster Neil Newhouse used the term earlier this week to discredit President Barack Obama’s post-convention bounce in the polls.

“While some voters will feel a bit of a sugar high from the conventions, the basic structure of the race has not changed significantly,” Newhouse wrote in a memo.

Original post is Romney: QE3 Just a ‘Sugar High’ by Political Capital.

Photograph by Charles Dharapak/AP Photo

Supporters shout "USA! USA!" as they attempt to drown out a protester as Mitt Romney campaigned in Fairfax, Va., on Sept. 13, 2012.

What does Mitt Romney have to say about President Barack Obama’s “shoot first, aim later” comment about his Republican rival’s approach to important matters?

“Well, this is politics,” Romney says. “I’m not going to worry about the campaign.”

Romney’s remarks come in in an interview with ABC News’ George Stephanoupolos, parts of it airing this evening on “ABC World News with Diane Sawyer”  and parts on “Good Morning America” tomorrow.

Obama made his remark about Romney in an interview with CBS News’ “60 Minutes,” a segment released yesterday. This was how Obama characterized Romney’s quick comments about the breaching of the U.S. embassy in Cairo and attack on the consulate in Benghazi, Libya, that killed the American ambassador, Chris Stevens, and three other Americans there.

 Romney, who had refused to answer reporters’ questions about the Federal Reserve’s newest round of “quantitative easing” earlier today, echoes in the ABC interview what his campaign’s policy director had said in an issued statement.

“Now the Federal Reserve, it says, ‘Look, this economy is not going well.’ They’re going to QE3. They’re going to print more money,” the former governor says of Fed Chairman Ben Bernanke. “What Bernanke’s doing is saying that what the president’s saying is wrong. The president’s saying the economy’s making progress, coming back. Bernanke’s saying, ‘No, it’s not. I’ve got to print more money.’”

“I think we have to have a leadership in Washington that encourages the private sector,” Romney says in the interview, excerpts released by ABC News. “I think printing more money, at this point, comes at a higher cost than the benefit it’s going to create,” Romney said.

Original post is Romney on Obama’s `Shoot First, Aim Later’ Critique: `Politics’ by Political Capital.

Photograph by Win McNamee/Getty Images

Mitt Romney campaigns on Sept. 13, 2012 in Fairfax, Virginia.

Republican Mitt Romney’s campaign today called the Federal Reserve’s announcement of another round of “quantitative easing” a measure of President Barack Obama’s failure with the economy.

“The Federal Reserve’s announcement of a third round of quantitative easing is further confirmation that President Obama’s policies have not worked,” Romney campaign policy director Lanhee Chen said in a statement issued this afternoon.

“After four years of stagnant growth, falling incomes, rising costs, and persistently high unemployment, the American economy doesn’t need more artificial and ineffective measures,” Chen said.  “We should be creating wealth, not printing dollars.”

The Romney campaign maintains that his own formula for reviving the economy — cutting taxes, reducing government regulation, spurring energy development and repealing the president’s health-care law — will spur job growth after three and a half years of unemployment running at over 8 percent.

“As president, Mitt Romney will enact bold, pro-growth policies that lead to robust job creation, higher take-home pay and a true economic recovery,” Lanhee’s statement said.

The Federal Open Market Committee today said that if “the labor market does not improve substantially,” it will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases “and employ its other policy tools as appropriate.”

The FOMC said it would probably hold the federal funds rate near zero “at least through mid-2015.” Since January, the Fed had said the rate was likely to stay low at least through late 2014. The Fed said “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

As Bloomberg’s Joshua Zumbrun reports today, Federal Reserve Chairman Ben Bernanke is enlarging his supply of unconventional tools to attack unemployment stuck above 8 percent since February 2009, a situation he has called a “grave concern.” The decision risks provoking a renewed backlash from Republicans, including presidential nominee Romney, who say Bernanke’s policies threaten to ignite inflation while doing little to spur the economy.

Original post is Romney: Fed Action, Obama Failure by Political Capital.

Photograph by Zhang Jun/Xinhua/Corbis

Federal Reserve Chairman Ben Bernanke testifies before the Joint Economic Committee about the Economic Outlook on Capitol Hill.

A majority of economists believe the Federal Reserve is poised to boost stimulus tomorrow, according to a Bloomberg Survey of 73 economists.

Sixty-four percent say the Fed is going to launch a bond-buying program at the conclusion of its meeting today and tomorrow in Washington. Sixty-eight percent say the Fed will extend its pledge to hold interest rates near zero into 2015 from its current target of late 2014.

Fed Chairman Ben S. Bernanke said in his Aug. 31 speech in Jackson Hole, Wyoming that he believes buying bonds — a strategy known as QE, for quantitative easing — is effective at boosting employment and that the risks are small. The first two rounds helped create 2 million jobs, he said.

Under QE programs, the Fed creates reserves in the banking system and uses them to buy bonds. Economists don’t agree on the form this new program will take.

One option, expected by 44 percent of economists, is for the Fed to announce an open-ended program where it perhaps announces a monthly pace of purchases that will continue until the central bank is happier with the economy.

The other option, expected by 30 percent of economists, is for the Fed to announce a lump-sum of purchases, perhaps $700 billon to be completed by a certain date. This was the format of the Fed’s second QE program, announced in November 2010, to buy $600 billion of Treasuries by the end of 2011.

Most economists agree that either way, the Fed will be buying both Treasuries and mortgage-backed securities.

The Standard & Poor’s 500 Index has risen 4.6 percent since the start of August and is near the highest levels in four years on expectations the Fed will act.

That suggests QE3 may draw the same sort of political reaction as QE2. While markets welcomed the boost QE2 gave to asset prices, the program drew sharp criticism from Republicans as commodity prices climbed and the dollar fell.

Republican Congressional leaders John Boehner of Ohio, Eric Cantor of Virginia, Mitch McConnell of Kentucky and Jon Kyl of Arizona sent Bernanke a letter in November saying that the program “introduces significant uncertainty regarding the future strength of the dollar.” Republican presidential candidate Mitt Romney has said he won’t reappoint Bernanke.

As QE2 ran its course, commodity prices receded, the dollar strengthened in the second half of 2011, and the rate of consumer-price increases tapered off, vindicating Bernanke’s predictions that QE would not lead to lasting inflation or a decline in the dollar.

Yet that doesn’t mean the debate won’t repeat.

Original post is Here Comes QE3 by Political Capital.

Photograph by AP Photo

Meeting with President-elect Richard Nixon are from left standing: Bryce Harlow, assistant to the president; Paul McCracken, Chairman of Economics Advisors, Alan Greenspan, advisor to Nixon, Dr. Arthur Burns, seated left, Nixon, and Rep. Wilbur Mills, chairman of the House Ways and Means Committee in New York City on Dec. 4, 1968.

The Fed is meant to be independent and free from political pressures emanating from Congress or the White House.

That hasn’t always been the case.

For instance, back in the early 70s, Fed Chairman Arthur Burns was pressured by Richard Nixon to manipulate interest rates to suit the political cycle.

Today, the Fed is probably as free as it ever has been from direct political manipulation. However, the November elections could still play a role in monetary policy: the Fed may feel an implicit pressure to maintain the status quo for fear of being used, or abused, by politicians searching for votes.

Given the previous political controversies over quantitative easing, the program to create money and buy bonds, it’s probable the Fed may feel unwilling to embark on a third round, even if it thought that this was necessary. That said, such an outcome looks unlikely at present, particularly in light of minutes from the FOMC’s April 24-25 meeting, published last week, that spoke of a more positive future for the economy. We should assume that more easing isn’t on the agenda.

Perhaps of more relevance is the growing view that it’s time to start tightening monetary policy. European concerns aside, a combination of higher consumer prices, easing conditions in credit markets, and possibly bottoming-out house prices all point in the direction of policy tightening. Sheila Bair, former chair of the FDIC, argued last week in the context of the JPMorgan trading loss that low rates are forcing banks to search for yield, which raises systemic risks in the financial system.

The job of setting monetary policy requires a crystal ball, something that no one has. There’s always a risk that the Fed acts too soon and dampens the recovery. The election, no doubt, will play on policy-setters’ minds. Subconsciously, FOMC members may prefer to avoid raising rates and being brought into the political debate. The result may be higher inflation and higher interest rates in the future.

Original post is The Fed and the Election Cycle by Political Capital.