The cost-benefit ratio has changed, and with it FOMC sentiment on monetary policy.
Since the meeting, better than expected June jobs figures — a 195,000 rise in payrolls, coupled with a 70,000 upward revision to prior months — tended to reinforce the case for some scaling back of bond buying in the next few months. More such data will be needed to cinch a September move.
Bernanke had an opportunity, as this was written, to recalibrate and refocus markets in a speech to a National Bureau of Economic Research conference, but in the final analysis he said nothing to disabuse realistic Fed watchers of their expectations that less generous doses of monetary stimulus are on the way.
True, the Fed chief said the decline in the unemployment rate to 7.6% from a peak around 10% overstates the labor market’s health and said a “highly accommodative policy is needed for the foreseeable future.” But he also voiced optimism. And after all, policy would still be “highly accommodative” if the funds rate remains near zero and the Fed were buying $65 billion of bonds per month instead of $85 billion.
Once “tapering” has begun, there is no guarantee that it’s going to proceed at a steady or mechanical pace. Depending on the employment and inflation data, among other factors, the FOMC could decide to make an initial reduction of, say $15-$20 billion, then hold at that new level of buying for some months before resuming the reductions — or even go back up if the data dictate.
Although the economy has shown more resiliency than many expected in the face of the ballyhooed “fiscal drag,” and although the FOMC’s “central tendency” forecast is for real GDP growth to reach 3%-3.5% next year, plenty of doubt remains about just how strong growth and job creation will be.
Bernanke and his colleagues have long said that monetary policy alone cannot do the job — that it needs help from other branches of government.
Higher taxes and fear of higher taxes borne of record deficit spending clearly have been a factor in slowing economic growth. But Fed officials aren’t just talking about fiscal policy.
They often have averred that “the large volume of new regulation,” as Richmond Fed President Jeffrey Lacker recently called it, is impeding business hiring and investment. Perhaps the Obama Administration was taking note of what Fed policymakers and others have been saying when it decided to delay implementation of the Affordable Care Act’s employer mandate.
But there’s plenty more of that sort of thing that, arguably, could cloud the economic outlook and keep the Fed from moving toward the exit as soon as it might like.
Steven K. Beckner is senior correspondent for Market News International. He is heard regularly on National Public Radio and is the author of “Back From The Brink: The Greenspan Years” (Wiley).