Do the FOMC Meeting Minutes or the New Fed Appointments Change the Expected Path for Monetary Policy?
I wrote this the other day and then forgot to post it at CBS and/or here:
Information in the minutes from the April 24-25 meeting of the Federal Reserve's policymaking committee released last week led many observers to conclude that monetary easing was more likely than we thought. The confirmation of Jeremy Stein and Jerome Powell as Federal Reserve governors on Thursday did little to alter that view since most believed these appointments would do little to change the balance of power in monetary policy meetings. However, the real news from these two events isn't about potential changes in the policy outlook, it's that current policy is now even more entrenched than before.
The key reason that many analysts changed their policy outlook was language in the minutes from the last meeting of the Federal Open Market Committee, in particular this phrase: "Several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough." However, the fact that "several members" of the committee favored more easing if the economy deteriorates "enough" was well known before the minutes were released. The speeches given by presidents of the regional Fed banks, members of the Board of Governors, and most importantly Chairman Bernanke himself, made this clear. Thus, the minutes confirm the commitment to existing policy -- stay the course for now unless conditions change dramatically in either direction -- rather than signaling a deviation from it.
The appointment of Jeremy Stein and Jerome Powell as Federal Reserve governors, the first time all seven positions on the Board of Governors have been filled since April 2006, also gives more gravity to existing policy. Both appointees are experts in the operation of financial markets, expertise that is needed at the Board. But they are not experts on the use of monetary policy tools such as quantitative easing to stabilize the economy, and are thus likely to defer to majority opinion on these matters, Chairman Bernanke's opinion in particular. This gives majority opinion more weight making it harder to change.
There is a final factor that will tend to lock present policy in place, the upcoming election. The Fed is historically reluctant to do anything in election years that appears to favor one party over the other. Thus, big policy moves are unlikely unless there is a clear justification for them. A substantial deterioration in the economy would provide the needed justification, but the hurdle for what constitutes "substantial" is larger in a presidential election year.
Together, all of these factors point to more persistence in current policy. If the economy takes a large unexpected downward turn, or if inflation begins to rise to worrisome levels policy could change, but for now present policy is firmly anchored in place.