Peter Coy at Bloomberg notes that I misinterpreted Rosengren on the first point of my last post:
Rosengren did not go quite as far as the Boston Globestory implied—that is, he did not specifically mention election-year pressures. The Globe writers, Steven Syre and Andrew Caffrey, paraphrased Rosengren as saying that the Fed should not worry if further easing is seen as influencing the presidential election. I wrote to them for clarification and Syre responded that “Rosengren’s quote was his response to a question about any potential political controversy around a fed stimulus vote two months before an election.” So it was the reporters who brought up politics, not Rosengren himself. That might seem like a small point, but in the arcane world of Fed politics, it matters. Tim Duy, a University of Oregon economist who blogs on Fed policy, told the Globe, “to pull back the curtain and say, ‘They’re doing this for the election,’ I think is a shift and reflects his level of frustration.” That’s an overstatement of what Rosengren said.
Small, but very important, point to be sure. Coy could have added "Tim Duy needs to ask better questions."
I likely jumped at the idea as it is one explanation for Fed inaction given the clear statements by doves calling for more policy in the context of the failure of the Fed to meet its dual mandate. But while there may be some lingering concerns at the FOMC of the political appearance, the central reason for inaction is likely Federal Reserve Chairman Ben Bernanke's uncertainty of the cost-benefit analysis. If he thought the benefits outweighed the cost, he could have pulled the FOMC in that direction. But he hasn't, indicating that he see the costs outweighing the benefits.
Bernanke's cost-benefit analysis is clearly become frustrating to those policymakers who see the issue as more clear cut, like apparently Rosengren. He now joins San Francisco Federal Reserve President John Williams and Chicago Federal Reserve President Charles Evans in calling for more aggressive policy, including open-ended quantitative easing. How big that coalition grows between now and September remains to be seen, but the pressure on Bernanke to change course is clearly intensifying.
