Tim Duy's Fed Watch

Holiday Preparation

Critical part of the Christmas season - picking the right tree.

We still have one or two respectable trees in Oregon.

Ahead of Black Friday

We are embarking once again into that time of the year when reporters around the world become entranced and enthralled with that orgy of consumerism that defines Christmas in America.  Soon we will be tracking the ups and downs of holiday sales with a zeal that is unmatched by any other regular economic event.  Weary reporters - those who clearly disappointed their editors at some point during the year - will be dispatched to local big box stores across the nation to record the lines forming in anticipation of 5am openings on the fabled Black Friday.  We will be bombarded with hundreds if not thousands of conflicting reports regarding the amount and patterns of holiday shopping, leaving overworked and underpaid analysts awash in data as they desperately try to quantify, once and for all, the "true" state of consumer spending - and thus by extension, the true state of the economy - in America.

 

Oooo, how I have come to loathe this exercise.  And yet, here I am again, fretting over the financial state of US households in between checking off items on the Thanksgiving shopping list.  It is like a car wreck - you don’t want to watch, but you can't take your eyes off it.

 

Car wreck is something of an appropriate comparison.  Recently I have begun using charts of this sort to depict the current economic environment:

 

 

Not fancy econometrics, I know - most of my audiences are not interested in unit root tests.  The point, obviously, is that even as activity creeps upward, the gap between the past and current trajectory of consumer spending is likely still widening.  Much, much faster growth is necessary to close that gap.  And households as of yet are seeing nothing to convince them their fortunes are set to change, that some Christmas miracle awaits.  To be sure, Bloomberg trumpeted today's data:

Confidence among U.S. consumers unexpectedly rose in November as a brightening outlook masked growing concern over joblessness.

How much did the outlook brighten?  The story continues:

The Conference Board’s confidence index increased to 49.5 from 48.7 the prior month. The New York-based Conference Board’s index, which focuses on the labor market and purchase plans, averaged 58 in 2008 and 103.4 in 2007.

Not much brighter.  Indeed, Economix more accurately reports the dismal mood of consumers, noting:

Over the last 30 years, the index has averaged about 95. In November, it was 49.5, up from 48.7 the previous month.

Yes, for three decades the Conference Board measure of confidence has averaged nearly twice current levels.  This tells us something about the strength of consumer spending.  Using the parallel measure from the University of Michigan:

Real year over year growth in the 1% range is not going to bring households back to trend anytime soon.    To be sure, given the dependence of household on debt financed spending, it is arguably correct that past trends were unsustainable, that the only possible outcome from this mess was a permanent shock to the level of household spending.  That, however, is likely cold comfort to the millions of Americans - those not employed by Goldman Sachs, of course - who are just now realizing that their standard of living has shifted permanently lower.  Lacking sufficient income gains and the ability to use debt to cover up their relative poverty, households are not seeing a path to a brighter future.  And they will increasingly look for someone to blame.  No wonder the knives are sharpening for Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke.  They are the public faces for an Administration that now owns this economy. 

 

And where are policymakers as we slog through the final month of 2009?  The Administration is poised to do virtually nothing:

The White House is lukewarm about proposals by congressional Democrats to introduce broad legislation to create jobs, instead favoring targeted measures that would be less likely to inflate the deficit, administration officials said.

 

There is as yet no agreement within the White House or in Congress on how to try to curb the U.S. jobless rate. But the differences in opinion suggest that rifts could emerge among Democrats as they wrestle with how to beat back the highest unemployment rate in a generation.

 

...Hamstrung by the nation's $1.4 trillion deficit and his pledge not to raise taxes on middle-class Americans, Mr. Obama is keen to avoid any measures suggestive of a second, big-ticket stimulus.

Indeed, the failure of the Administration to take bold moves early in the year now cripples it in any attempt to take bold action now.  Apparently, the best we can expect now is a "Cash for Caulkers" program that will dribble money into the economy, ensuring that we do little if any better than limp along.

 

Likewise, monetary policymakers too are caught in the headlights.  As has already been widely noted, the minutes of the most recent FOMC meeting reiterated the Fed's eagerness to reverse, not extend, policy: 

...Overall, many participants viewed the risks to their inflation outlooks over the next few quarters as being roughly balanced. Some saw the risks as tilted to the downside in the near term, reflecting the quite elevated level of economic slack and the possibility that inflation expectations could begin to decline in response to the low level of actual inflation. But others felt that risks were tilted to the upside over a longer horizon, because of the possibility that inflation expectations could rise as a result of the public's concerns about extraordinary monetary policy stimulus and large federal budget deficits. Moreover, these participants noted that banks might seek to reduce appreciably their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation. To keep inflation expectations anchored, all participants agreed that it was important for policy to be responsive to changes in the economic outlook and for the Federal Reserve to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and pace.

Read that carefully and realize this:  An apparently not insignificant portion of the FOMC believes that there is a terrible risk that banks loosen their credit standards and increase lending at a time when, even if the economy posts expected gain, unemployment remains at unacceptably high levels.  Silly me, I thought increased lending was the whole point of the exercise to lower interest and expand the balance sheet.  That whole credit channel thing.  If not to expand lending during a credit crunch, then what else are they expecting? 

 

I am in shock that this sentence made it into the minutes.  One can only conclude that a significant portion of policymakers are simply clueless.  Or, more disconcerting, they have lost all faith in the ability of financial institutions to channel capital into activities with any hope of financial returns.   Has the Fed now embraced the view that they manage the economy through little else then fueling and extinguishing bubbles?

 

At this juncture, only St. Louis Fed President James Bullard is signaling a willingness to at least keep the option of ongoing balance sheet expansion alive:

Federal Reserve Bank of St. Louis President James Bullard wants the Fed to continue to buy mortgage-backed securities beyond the March 2010 cutoff to give policy makers more flexibility as they seek to shepherd the economy toward recovery.

 

"I have advocated to keep the asset-purchase program open but at a very low level, and wait and see what happens, and as information comes in about the economy we can adjust that program while the federal-funds rate remains at zero," Mr. Bullard told Dow Jones Newswires in an interview Sunday. He said "no decision has been made" about the program's fate.

 

Mr. Bullard will be a voting member on the interest-rate-setting Federal Open Market Committee in 2010. In its statement after the November FOMC meeting, the central bank reiterated that it will continue to monitor its asset-purchase programs "in light of the evolving economic outlook and conditions in financial markets."

Maybe if unemployment continues to rise Bullard's vote will matter next year.  Maybe.

 

Considering what all this means in light of Black Friday, I tend to think Phil Izzo at the Wall Street Journal is on the right path:

New reports Monday didn’t paint an encouraging picture. The Conference Board released a survey of spending intentions that showed U.S. households expect to spend an average of $390 this season, down 7% from estimates of $418 last year. That number is especially distressing because consumers were unusually pessimistic last year as the financial crisis went into full swing just as holiday shopping was getting underway.

 

“Job losses and uncertainty about the future are making for a very frugal shopper. Retailers will need to be quite creative to entice consumers to spend, both in stores and online this holiday season,” said Lynn Franco, director of the Conference Board Consumer Research Center.

 

A separate report from retail-tracking firm NPD Group indicated consumers may not be flocking to the mall for Black Friday. Just 32% of respondents said that they expect to begin their holiday shopping on Thanksgiving weekend or earlier.

Still, more broadly, whether sales gain 2% or 4% this holiday season may have great influence on the animal spirits that govern equity markets, I doubt it would alter much what should be our overall assessment of the economy:  Economic activity is now increasing, something for which we should all be thankful this weekend.  The alternative would be very unpleasant.  But that growth should not lull us into policy complacency with regards to the very real economic stress felt across the nation.  By all forecasts, it simply falls far short of what is necessary to restore confidence among households.  2.8% just won't cut it.     

The Fed in a Corner

Over the years, I have warned a seemingly countless number of undergraduates that Fed's hold on monetary independence was tenuous at best.  Independence is not guaranteed by the Constitution.  Congress made the Fed, and Congress can unmake the Fed.   The Fed could only maintain the privilege of independence if policymakers pursued policy paths that fostered maximum, sustainable growth.  Deviating from such paths would have consequences.

 

The Fed is quickly learning the extent of those consequences, as Congress launches an assault on the Fed's independence. 

 

Some find the loss of support for the Fed puzzling.  Brad DeLong, for example, notes that Bernanke & Co. are doing exactly what they should have done:

First of all, from the day after the collapse of Lehman Brothers, the policies followed by the U.S. Treasury and the U.S. Federal Reserve and the U.S. administrations have been very helpful. They have been good ones. The alternative--standing back and watching the markets deal with the situation--would have gotten us a much higher unemployment rate than we have now. Credit easing by the Fed and support of the banking system by the Fed and the Treasury have significantly helped the economy: have kept things from getting much worse.

The Fed earns accolades from academics for its handling of the crisis, in particular since the Lehman failure.  Fair enough; I have few quibbles with policy since last fall.  But what about the years before Lehman, when the crisis was building?  Where was the Fed then?  Did they abdicate regulatory responsibility?  How did banks develop such incredible exposure to off-balance sheet SIV's?  How could the Fed ignore increasingly predatory lending in the mortgage market?  What exactly was Timothy Geithner, then president of the all important New York Fed, regulating and supervising?  Clearly not Citibank.

 

To be sure, there were plenty of other regulatory failures along the way, but the Fed - an independent Fed - should have been in a much better position to raise regulatory and supervisory roadblocks during the debt build-up compared to other, more politically susceptible  agencies.  The Fed's independence should have allowed it to be a leader, not a follower.  Ideological objections to regulation, apparently, prevented the Fed from looking for problems in their own backyard.  Rapid debt creation was justified as a response to asset appreciation, with little concern that the connection might just be a bit more self-reinforcing.

 

The resulting crisis left the Fed struggling to keep the ship afloat - and in that struggle the Fed stepped too deep into the realm of fiscal policy in an effort to keep the trains running on time.  But that mission creep was simply incompatible with the Fed's desire for secrecy.  This was all to predictable:  Like it or not, you cannot commit literally billions of dollars of taxpayer money and in the process secretly funnel money through AIG to the investment banking community without expecting just a little blowback.   The last I checked, this was still a democracy. 

 

Worse now for the Fed is the impression that monetary authorities work first and foremost for Wall Street.  Of course, Fed officials see this a bit differently - they see supporting Wall Street as their mechanism for supporting Main Street.  Ultimately, without the former, the latter is locked out of capital markets, and economic chaos follows.  The purpose of Wall Street is supposed to be to channel investment funds into Main Street.  But most Americans no longer view Wall Street as ultimately working in their best interests - maybe correctly.  This is the same Wall Street that aggressively pushed garbage loans onto the American people as policymakers praised the wonders of financial innovation.   When did the purpose of finance evolve into simply a mechanism to enrich the relative few at the expense of many?  And when did policymakers embrace this view?  As Paul Krugman has noted, the Fed cannot envision a world not dominated by the magic of structured finance.  Yet this is a world that failed us completely.

 

Ultimately, can you really blame Americans if they have lost their faith in the supposedly omnipotent Federal Reserve?

 

Now the Fed's relationship with the public is a mess.  And I suspect it is going to get much worse.  Free Exchange succinctly identifies the new challenge:

An independent central bank is crucial. Political control of monetary policy must inevitably lead to accelerating inflation and long-run economic instability. But at the moment, the American economy could use an increase in expected inflation. And a real threat to Fed independence would almost certainly deliver it, either because markets would anticipate increased political influence on monetary policy ever after, or because the Fed would seek to fend off pressure from Congress by easing further, which amounts to the same thing. But we don't actually want there to be a real threat to Fed independence, because that way uncontrolled inflation lies.

The Fed has made it clear that unemployment is expected to remain unacceptable high in the medium run while disinflationary pressures persist.  Yet policymakers have also made it clear that they believe they have done all they can, or are willing, to do to combat unemployment.  They equate credibility with maintaining a 1.7-2% inflation target.  Couldn't credibility be consistent with a 4% inflation target?  And wouldn't such a target be more appropriate in a zero interest rate world?  But alas, challenging the Fed now with their independence at stake will only convince policymakers to dig in their heels more aggressively. 

 

What if the only way to get the Fed to do the right thing is to strip them of their independence?  It is a real possibility, although disastrous in the long-run.  Yet look at the dithering from the Bank of Japan, still faced with a deflationary environment years and years after they pushed to zero rates:

It was no coincidence that the new government of Yukio Hatoyama chose the day when the Bank of Japan (BoJ) was holding a rate-setting meeting to make a lot of noise on the issue. Both the deputy prime minister and finance minister made concerned comments. Their unspoken message to the BoJ was clear: remove monetary-stimulus measures at your peril. At the end of its two-day meeting, the BoJ left its policy rate unchanged at 0.1%, and continued to use other measures, such as buying government bonds, that it believes make monetary policy “extremely accommodative.”

 

But the BoJ does not give the impression it is particularly concerned about prices. It believes there are not yet clear signals of a deflationary mindset in corporations or the public at large, and that a recovery in private demand will eventually pull the economy out of its slump.

Good Lord, we have been talking about pulling Japan out of its slump for TWO DECADES!  Fear of inflation combined with a perception that acquiescing to a higher inflation target would be akin to losing monetary independence has kept BoJ policy constrained for years, ensuring the citizens of Japan ongoing pain.  Is the Fed headed to the same place?  Maybe. 

 

I don't think the Fed can regain the trust of the public while at the same time protecting the secrecy of their actions to save Wall Street (moreover, it is not clear that such secrecy is now needed in any event).  The relationship between policymakers and financiers is now seen as far too cozy from the perspective of the public.  I think the Fed needs to make clear that they work for the people, not for Wall Street.  A strong statement by Federal Reserve Chairman Ben Bernanke that a firm that is too big too fail is simply too big - that we should no longer tolerate the expansion of financial firms to the point that they pose systemic risk - would be a good start.  Simply put, Bernanke's choice set is dwindling - either risk losing independence, or step up to the regulatory and policy plate like you intend to hit one out of the park.  If Wall Street is no longer working for Main Street, it is time to side with Main Street.       

Should the Fed Be Doing More?

Monetary policy looks to be at a protracted standstill - or even arguably becoming less accommodative as purchases of long dated securities draws to a close - despite incoming information that points toward persistently high unemployment rates and an ongoing disinflationary environment. Is policy stability the consequence of changing economic conditions, a perceived ineffectiveness of nontraditional policy, or a willingness of policymakers to be constrained by conventional policy limitations in the absence of impending financial doom? My sense is that all three elements are in play.

It is pretty clear that economic conditions changed dramatically mid-year as inventory correction and policy stimulus brought the recession to a close, at least if measured by growing output. To be sure the sustainability of the gains are in question. I hold little hope that growth could be sustained in the absence of the policy efforts to date, and the Administration is likely starting to realize that it underplayed its hand this year, offering far to little stimulus to effect stabilization from the all important jobs perspective. Calculated Risk sees growing potential for a second stimulus package (in spirit if not in name), the support for which will gain as concerns about midterm elections grow. Still, from the perspective of monetary policymakers, positive growth after such a long recession could only be met with a sigh of relief and, perhaps inevitably, a willingness to pause and assess the implications and impact of policy to date.

The problem with pausing, however, is that a combination of maximum sustainable growth and price stability are in fact the Fed's objective, we seem to be falling short on both measures. Unemployment continues to climb, nonfarm payrolls continue to fall, and core-PCE inflation continues to decelerate. Moreover, Fed forecasts suggest that these trends will continue for literally years. Leaving aside inflation fears that seem to be largely contained in a handful of what I think are crowded trades (gold and TIPS), what should the Fed be doing on the basis of actual, incoming data? Have they truly hit the limits of policy? This brings be to an ongoing debate between Paul Krugman and Scott Summner, with the recent participation of Joe Gagnon.

A starting point for further analysis is Krugman's assertion that conventional policy has been brought to a standstill. Zero is zero:

I keep seeing economics articles and blog posts that insist that we’re NOT in a liquidity trap (and, of course, that yours truly is all wrong) because the situation doesn’t meet the author’s definition of such a trap. E.g., the interest rates at which businesses can borrow aren’t zero; or there are still things the Fed could do, like buying long-term bonds or corporate debt, or something.

Well, my definition of a liquidity trap is, purely and simply, a situation in which conventional monetary policy — open-market purchases of short-term government debt — has lost effectiveness. Period. End of story.

Now, if you prefer a different definition of a liquidity trap, OK; call our current situation a banana, instead. But changing the name does not change the essential fact — namely, conventional monetary policy has lost effectiveness.

The loss of conventional monetary tools led Krugman, and many others, to conclude that stimulus efforts should focus on the fiscal side of the equation. In response, Scott Sumner has long argued that more aggressive monetary expansion was needed, to which Krugman replies that at zero rates, more money is ineffective at stimulating output:

A dozen years ago I would probably have agreed. But way back in 1998 I tried to think my way through Japan’s situation with a little intertemporal model, and surprised myself with the conclusion: under liquidity-trap conditions, it doesn’t matter at all what happens to M.

In that model, prices are assumed sticky in the short run, so P is predetermined. What, then, determines Y? Well, it’s a real thing — as opposed to a nominal thing. In the model it’s actually tied down by an Euler condition, by future consumption and the real interest rate (which is stuck thanks to the zero lower bound). Monetary policy has no traction at all against the right hand side of the equation.

Now, the equation still holds. But all that tells us is that any changes in the money supply are offset one for one by changes in velocity. Focusing on nominal spending makes you think that low nominal spending is the problem, a problem with a monetary solution; but actually it’s the symptom, and monetary policy doesn’t matter (unless it can affect expected future inflation, but that’s another story).

Joe Gagnon delivers evidence that in a world with multiple interest rates, unconventional policy did in fact depress interest rates at longer horizons or on non-Treasury debt:

In recent months, central banks have purchased large quantities of longer-term assets. These purchases appear to have been effective at pushing down longer-term interest rates, which should stimulate economic activity. For example, the Federal Reserve (Fed) has purchased large quantities of longer-term agency-backed securities and Treasury bonds. The following table shows that Fed communications about such purchases had substantial effects on a range of long-term interest rates, including on assets that were not included in the purchase program, such as interest rate swaps and corporate bonds….Since March 19, the Fed has not made any substantive changes to its planned purchases of longer-term assets. Over this period, the 10-year Treasury yield has risen about 75 basis points and the corporate yield has fallen about 200 basis points, reflecting a relaxation of the extreme financial strains and flight-to-quality that characterized the first few months of this year. Conventional fixed mortgage rates, a key target of the Fed's policy easing, have changed little on balance since late March.

Which would appear to support the contention that unconventional policy does have a stimulus impact, and that monetary policy could push further by continuing the soon-to-end Treasury purchase program, and thus would it would be worth revisiting its expected conclusion. Still, would this be enough in light of the crux of Krugman's argument that is worth repeating: "... monetary policy doesn’t matter (unless it can affect expected future inflation, but that’s another story)."? Krugman elaborates:

We’re in a liquidity trap, with interest rates up against the zero bound. This means that conventional monetary policy isn’t sufficient. What should we do?

The first-best answer — that is, the answer that economic models, like my old Japan’s trap analysis, suggest would be optimal — would be to credibly commit to higher inflation, so as to reduce real interest rates.

But the key thing to recognize about this answer is that it’s all about expectations — the central bank only has traction over expected inflation to the extent that it can convince people that it will deliver that inflation after the liquidity trap is over. So to make this policy work you have to (i) convince current policymakers that it’s the right answer (ii) Make that argument persuasive enough that it will guide the actions of future policymakers (iii) Convince investors, consumers, and firms that you have in fact achieved (i) and (ii).

In reality, we haven’t even gotten anywhere near (i): the conventional wisdom is still that any rise in expected inflation above 2 percent is a bad thing, when it’s actually good.

From Krugman's perspective, the key is not simply increasing the money supply via increasing nonconventional purchases. The key is fundamentally changing inflation expectations. This fits with Brad DeLong's definition of quantitative easing:

Quantitative easing policy is the altering of market expectations of the long-run path of the money stock.

By this definition, I don't believe the Federal Reserve has pursued anything close to quantitative easing because policymakers have consistently defined their actions as temporary "credit easing." At best, they have acted to ensure that the long-run path of the money stock (and thus inflation) will not decline from previously stated objectives. But avoiding outright deflation is not the same as increasing expectations of inflation.

For his part, Sumner says this is what he has been saying all along:

Krugman should have been advocating monetary stimulus all along.　 The real problem is that his allies in government; Obama, Pelosi, Reid, etc., don’t even know the first best option exists.　 And how could they?　 How often is monetary　stimulus mentioned in columns　written by liberal pundits?　 　If they realized that they were about to get decimated in the 2010 midterm elections because a few nutty right-wingers at the Fed think the economy needs less stimulus, not more, there would be outrage in Congress and the Administration.　 They’d be marching down to the Fed (metaphorically of course, to avoid looking heavy-handed) and make it very clear that the Fed needs to produce robust growth in aggregate demand or else there will be big changes in the way the Fed is set up and regulated.　 If they don’t seem "receptive," then quietly tell the FOMC; "Think the Dodd bill is bad?　 You can’t even imagine how much worse we can make it."

I think a case can be made that in a world were interest rates have been pushed to zero, first in Japan, then in the US, etc., policymakers would be forced to rely on heighten inflation expectations should they hope to have an impact on activity - essentially, resetting the bar. Sumner essentially argues that resetting that bar is exactly what is needed. And Krugman appears to believe this as well, but ultimately he is correct on the political economy angle. The Fed seems in no way to be dissuaded from its central tendency for inflation in the range of 1.7-2%. And the challenge is much more widespread than Sumner implies. A "few nutty right-wingers at the Fed" almost certainly cannot include San Francisco Fed President Janet Yellen. Her last speech was instructive. She possess a clearly pessimistic outlook:

It’s popular to pick a letter of the alphabet to describe the likely course of the economy. The letter I would choose doesn’t exist in our alphabet, but if I were to describe it, it would look something like an "L" with a gradual upward tilt of the base.　With such a slow rebound, unemployment could well stay high for several years to come. In other words, our recovery is likely to feel like something well short of good times.

Note - several years of high unemployment! Regarding inflation:

...But experience teaches us that budget deficits do not cause inflation in advanced economies with independent central banks that pursue appropriate monetary policies. As for the Fed, you can be 100 percent certain that price stability will remain our objective, regardless of the stance of fiscal policy.

..I believe that the more significant threat to price stability over the next several years stems from enormous slack in the economy that is pushing inflation lower. Today, inflation is already very low. Over the past 12 months, consumer prices as measured by the personal consumption price index actually fell by one-half percent. After removing the effects of volatile food and energy prices, core prices rose by 1¼ percent.　 That’s below the 2 percent rate that I and most of my fellow Fed policymakers on the Federal Open Market Committee (FOMC) consider an appropriate long-term price stability objective. The public’s inflation expectations, which can independently influence inflation, remain well anchored, which is appropriate given the Fed’s record and its commitment to price stability. And with slack likely to persist for years and wages barely rising, it seems probable that core inflation will move even lower over the next few years.

Now we have several years of unemployment and lower core inflation over two years. Consider that forecast carefully - Janet Yellen, not a right-wing nut job, is giving a forecast that makes clear the Fed will fall short over the medium term in its pursuit of price and output stability. And not just by a narrow margin. What does this mean for policy?

...This landscape presents clear challenges for monetary policy. We face an economy with substantial slack, prospects for only moderate growth, and low and declining inflation.　 With the federal funds rate already at zero for all practical purposes, the Fed’s traditional policy tool is as accommodative as it can be. To provide more stimulus, the Fed has used unconventional policy tools, including emergency lending programs to promote liquidity and push longer-term interest rates lower. However, many of these programs are winding down or nearing completion. That is why the FOMC stated that "economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period" following our meeting last week.

Yellen states policy now amounts to wait and see - or, possibly more accurately, be contractionary by allowing the existing unconventional tools to wind themselves down and not be replaced. That is because they viewed those tools not as expansionary in their own right, as efforts to change expectations about the long-run path of the money stock, but as temporary credit easing measures. In the absence of those measures, policy reverts back to the zero bound.

In short, Janet Yellen is saying that they are at the limits of policy despite an outlook that is inconsistent with sustainable output and stable prices. A cynic might point out that when Wall Street is in danger, the Fed rewrites the play book, but for Main Street, policymakers have only one message: We have done all we can do.

Moreover, she finishes up with the required warning from all Fed officials:

At some point, of course, we will have to tighten policy—and we certainly have the means and the will to do so. We are—and always will be—steadfast in our determination to achieve both of our statutory goals of full employment and price stability. Until that time comes though, we need to provide the monetary accommodation necessary to spur job creation and prevent inflation from falling any further below rates that are consistent with price stability.　Thank you very much.

The Fed has done all it can - or is willing - to do at this point. We have no intention to do more. Our focus is only on preparations to reverse what we have already done. The commitment to price stability remains unchanged.

Bottom Line: Economic conditions are improving, but at a pace that promises that unemployment will remain unacceptably high for years. Millions of workers left on the sidelines for years. Acceptable from a policy perspective? No. But is the Fed ready to engage in what would be the real next step for policy - a concerted effort to boost inflation expectations and regain control over monetary policy? A stated higher objective for inflation and a massive quantitative easing program to support achieving that ojective? No. There is simply nothing to suggest the Fed is waiting for anything other than the first chance to "normalize" policy in the traditional sense. That may still be a long time from now, but is nonetheless the shore the Fed seeks as they attempt to navigate out of unconventional policy, not deeper in.