This page has been archived and commenting is disabled.
Fed Vice-Chair Stan Fischer Explains What Yellen Really Meant Last Week - Live Feed
With the world now convinmced that Janet Yellen is as dovish as she has ever been on rate hikes, today comes the first post-FOMC speech. None other than Vice-chair Stanley Fischer is due to address The Economic Club of New York on the topic of "Monetary-policy lessons and the way ahead." As Art Cashin warned this morning, Fischer "seems to feel that the Fed must raise rates this year. He is also the only Fed official to concede that any rate hike will be different than any seen before."
Headlines:
- *FISCHER: ECB QE PUTS DOWNWARD PRESSURE ON U.S. LONG-TERM RATES
- *FISCHER: SIMPLE RULES CANNOT REPLACE JUDGMENT FOR FED POLICY
- *FISCHER: LIFTOFF WHEN FED `REASONABLY CONFIDENT' ON INFLATION
- *FISCHER SAYS DOLLAR'S RISE ALSO REFLECTS RELATIVE U.S. STRENGTH
- *FISCHER SAYS FUTURE FED RATE RISES WON'T BE SMOOTH UPWARD PATH
- *FISCHER SAYS THERE'S UNCERTAINTY ABOUT LEVEL OF FUTURE RATES
- *FISCHER: FED POLICY GUIDED BY DATA AND PURSUIT OF DUAL MANDATE
- *FISCHER SAYS RATE LIFTOFF LIKELY WARRANTED BEFORE END-2015
- *FISCHER: EXPLICIT FED FORWARD GUIDANCE TO DECLINE POST-LIFTOFF
- *FISCHER SAYS STRONGER DOLLAR OFFSETTING SOME BENEFITS OF ECB QE
Live feed:
* * *
Full Speech:
Monetary Policy Lessons and the Way Ahead
For over six years, the federal funds rate has, effectively, been zero. However it is widely expected that the rate will lift off before the end of this year, as the normalization of monetary policy gets underway.
The approach of liftoff reflects the significant progress we have made toward our objectives of maximum employment and price stability. The extraordinary monetary policy accommodation that the Federal Reserve has undertaken in response to the crisis has contributed importantly to the economic recovery, though the recovery has taken longer than we expected. The unemployment rate, at 5.5 percent in February, is nearing estimates of its natural rate, and we expect that inflation will gradually rise toward the Fed's target of 2 percent. Beginning the normalization of policy will be a significant step toward the restoration of the economy's normal dynamics, allowing monetary policy to respond to shocks without recourse to unconventional tools.
I would like to take this occasion to look back on some lessons learned during our time at the effective lower bound on the interest rate, and also to look forward.1
Monetary Policy since the Crisis
Let me first take a step back in time. Prior to the crisis, the financial system was more fragile than we realized. Key vulnerabilities included excessive leverage, overdependence on short-term funding, and deficiencies in credit ratings, underwriting standards, and risk management. Importantly, interconnections across financial institutions heightened the risk of contagion through cascading losses. Some of these interconnections emerged from the use of complicated financial instruments that created seemingly safe and liquid assets. At the time, it was common to say that risk was being dispersed and allocated to those best able to bear it. But rather than distributing risk widely, these instruments concentrated risk on the balance sheets of a relatively small number of highly levered financial institutions.
As a result, as the subprime crisis developed, market participants pulled back from risk taking, leading to deleveraging spirals and fire sales.2 The damage spread across the globe. Following the collapse of Lehman Brothers on September 15, international trade collapsed as panic and financial connections transmitted distress across borders.3 Of course, the economy's vulnerabilities did not stem from the private sector alone: in the public sector, gaps in the regulatory structure allowed important financial institutions to escape comprehensive supervision, and regulators were insufficiently focused on the stability of the system as a whole.
The Federal Reserve responded aggressively to the crisis.4 By the end of 2008, the Federal Open Market Committee (FOMC) had reduced the target federal funds rate from 5-1/4 percent to, effectively, zero. The Fed also acted forcefully as the lender of last resort--in its traditional role of providing short-term liquidity to depository institutions, and also by providing liquidity directly to borrowers and investors in key credit markets.5
In addition, the worldwide scope of the crisis called for concerted international action. Because of the global nature of dollar funding markets, the Fed authorized dollar liquidity swap lines with major central banks, beginning in December 2007. In October 2008, central bankers coordinated reductions in policy rates and the Group of Seven agreed to use all available tools to prevent the failure of systemically important financial institutions.6 The next month, the Group of Twenty announced a broad common strategy, including fiscal expansion.
These steps likely prevented a second Great Depression, but they were not sufficient to avoid a severe global contraction.
In the United States, with the federal funds rate at its effective lower bound by the end of 2008, the FOMC judged that it could not provide much additional accommodation via its conventional tool--reducing the federal funds rate.7 Instead, the FOMC used two unconventional tools: large-scale asset purchases and enhanced forward guidance. To varying extents, foreign central banks have also been using these tools.
The Fed's asset purchases did not have the conventional aim of increasing reserve balances to pull down short-term rates.8 Rather, purchases of longer-term securities lowered longer-term yields through portfolio balance effects.
The evolution of our asset purchases reflected a learning process for policymakers. In the early programs, the FOMC specified the expected quantities of assets to be acquired over a defined period. In contrast, with QE3 (the most recent round of quantitative easing, implemented from September 2012 to October 2014), the FOMC announced that we would continue to purchase securities at a certain monthly pace until the outlook for the labor market improved substantially in a context of price stability. Later, the FOMC noted that the pace of purchases was also data dependent, allowing the pace to be revised based on its assessment of progress toward its long-run objectives.
With the federal funds rate near zero and the Fed creating and adjusting new asset purchase programs, it became difficult for the public to anticipate how the FOMC would likely conduct monetary policy and respond to changing economic conditions. Thus, the FOMC began to rely heavily on enhanced forward guidance to communicate its intentions. Forward guidance works in part because it also constrains the flexibility of decisionmakers when the time comes to make their future decisions.9
Nonetheless, a number of potential costs might be associated with unconventional tools. When interest rates are extremely low, risks to financial stability might grow. In addition, elevated securities holdings could reduce the Fed's income and remittances to the U.S. Treasury when rates eventually rise.10
Further, the Fed's quantitative easing appeared significantly to affect foreign asset markets, and to have contributed to a surge of capital inflows to emerging-market economies (EMEs).11 Our asset purchase programs were even called a "currency war." However, eventually, most EMEs seemed glad to receive those flows. Interestingly, the asset purchases recently announced by the European Central Bank (ECB) appear to be putting downward pressure on longer-term interest rates in the United States. In addition, the ECB's policy should increase growth in Europe, which will be beneficial for U.S. exports. Although some of these benefits may be offset by the recent appreciation of the dollar, much of that increase likely reflects other factors including the relatively strong performance of the U.S. economy.
Looking back, there is ample evidence that supports the view that the Fed's asset purchases contributed to a stronger U.S. recovery, by raising the prices of the assets purchased and close substitutes, as well as those of riskier assets.12 Our experience also shows that forward guidance helped better align market expectations of Fed policy with the Committee's policy intentions.13 In brief, unconventional policies helped bring down long-term yields both by reducing term premia and by lowering the expected path of future short-term rates.
The Recovery from the Financial Crisis
Despite monetary stimulus, the recovery from the financial crisis has been even more sluggish than we had expected. The slow recovery provides more evidence that severe financial crises have long-lived effects, as Reinhart and Rogoff, and others, have documented.14
The gradual pace of the recovery has likely reflected both demand and supply factors. With respect to aggregate demand, the economy faced several important headwinds: efforts by households and businesses to rebuild their balance sheets, persistently tight credit conditions, the extreme weakness of the housing sector, the significant drag from fiscal policy in the years from 2011 to 2013, and the growth slowdown in Europe and other parts of the world.
Turning to aggregate supply, it appears that productivity growth has slowed.15 One notable manifestation of slow productivity growth is that last year, unemployment fell significantly further than we had anticipated as of the start of the year--a pattern that occurred in the prior four years as well--whereas gross domestic product growth fell short of our expectations, as it had in three of the four prior years. However, productivity is extremely difficult to predict. For my part, I believe that the enormous gains in human welfare that the information technology explosion seems to be generating are likely to continue, and will perhaps eventually return measured productivity growth to its long-run historical pace.
Conditions for Liftoff
Although the recovery has been slow, there has been significant cumulative progress. An increase in the target federal funds range likely will be warranted before the end of the year. Liftoff should occur when the expected return from raising the interest rate outweighs the expected costs of doing so. In deciding when that time has come, we will continue to monitor a wide range of information regarding labor market conditions, inflation, and financial and international developments. We anticipate that it will be appropriate to raise the target range when there has been further improvement in the labor market and we are reasonably confident that inflation will move back to our 2 percent objective over the medium term.
Policy Normalization
Full normalization of monetary policy would allow the Fed to rely on its traditional policy framework of adjustments to the federal funds rate. However, as long as our balance sheet remains sizable, we will not be able to implement monetary policy with our traditional tool of repurchases. It is important that, when we change the rate for the first time in a long time, we are certain that we have the operational tools to control the federal funds rate--and, accordingly, we have developed and tested new operational tools to control the federal funds rate.
As discussed in the FOMC's statement titled Policy Normalization Principles and Plans, which was published following the September 2014 FOMC meeting, we will use the rate of interest on excess reserves (IOER) as our primary tool to control the federal funds rate.16 We also plan to use an overnight reverse repurchase agreement (ON RRP) facility, as needed. In an ON RRP operation, counterparties may invest funds with the Fed at a given rate, possibly subject to a cap on the aggregate amount invested. Because ON RRP counterparties include many money market participants that are not eligible to receive IOER, the facility can be a powerful tool for controlling money market interest rates. Indeed, testing to date by the New York Fed suggests that ON RRP operations have generally established a soft floor for such rates.17
However, an ON RRP program also has certain risks. For example, a large and persistent program could have unanticipated and adverse effects on the structure of money markets. In addition, in times of stress, demand for the safety and liquidity of ON RRPs with the central bank might increase sharply, potentially exacerbating disruptive flight-to-quality flows.18 To mitigate these risks, the FOMC has agreed that it will use an ON RRP facility only to the extent necessary and will phase it out when it is no longer needed.
In addition, the Fed has been discussing and testing other supplementary tools, such as term reverse repurchase agreements and term deposits, and can use these tools as needed to help support money market rates.
With regard to balance sheet normalization, the FOMC has indicated that it does not anticipate selling agency mortgage-backed securities. When the time comes, we plan to normalize the balance sheet primarily by ceasing reinvestment of principal payments on existing holdings. When the FOMC chooses to cease reinvestments, the balance sheet will naturally contract, with a corresponding reduction in reserve balances. This runoff of our securities holdings will also gradually remove accommodation, an effect that we will need to take into account in setting the stance of policy.
During normalization, we will, no doubt, learn more about our different tools and make adjustments to our operating framework. In part because of this adaptability, I am confident that by using IOER and, as needed, these supplementary tools, we will be able to raise short-term interest rates when it becomes appropriate.
Monetary Policy after Liftoff
The focus of the great bulk of the discussion on monetary policy during the last few years, has been on liftoff--on the circumstances under which the FOMC will choose to raise the federal funds rate, on the date on which that will happen, and on the effect of the Fed's very large portfolio on how it will manage the liftoff process. Those questions are natural after more than six years during which the federal funds rate has been held at its effective lower bound.
But as liftoff approaches, we need to think also about what will happen next. For liftoff is only the start of the process of normalization, and, going forward, the FOMC will once again be changing the federal funds rate as necessary, both up and down. Accordingly, discussion of monetary policy needs to begin to shift to the future path of interest rates, and thus to the basis on which the FOMC will set interest rates following liftoff.
There has been a lively discussion of one element of the future path of the federal funds rate: whether liftoff should be sooner with a gradual rise in the rate, or whether liftoff should occur later and be followed by a steeper path of the rate.19 These discussions are useful when considering the appropriate timing of the first increase in the federal funds rate. But what comes after the first increase? Standard interest rate projections might incline one to believe that the path of the federal funds rate after liftoff will consist of a steady rate of increase from zero to the longer-run normal nominal federal funds rate, which will be equal to the natural real rate of interest plus our 2 percent inflation goal. One might even look back to the period from 2004 to 2007 and conclude that the FOMC will raise the federal funds rate by 25 basis points every meeting, or every second meeting, or every third meeting, depending on the date of liftoff.
I know of no plans for the FOMC to behave that way. Why not? Isn't that what the calculation of optimal control paths shows? Yes. But a smooth path upward in the federal funds rate will almost certainly not be realized, because, inevitably, the economy will encounter shocks--shocks like the unexpected decline in the price of oil, or geopolitical developments that may have major budgetary and confidence implications, or a burst of greater productivity growth, as the Fed dealt with in the mid-1990s.
When shocks happen, as they do, policymakers will have to respond to at least some of them. Accordingly there is considerable uncertainty about the level of future interest rates--a degree of uncertainty that can be estimated statistically, and that should be taken into account by market participants and recognized by the FOMC when it discusses future levels of interest rates. The uncertainty about future levels of the federal funds rate can be represented in a "fan chart"--that is, a figure showing the expected path of the federal funds rate as well as a range representing the degree of uncertainty around that path.20
The two sure elements of forward guidance that the FOMC will be able to offer after liftoff are that monetary policy will continue to be aimed at fostering the Committee's dual objectives, and that it will be data driven. As we move away from the zero lower bound, the data to which we will be responding will be driven less and less by the financial crisis and Great Recession, and increasingly by post-liftoff economic developments. Whatever the state of the economy, the federal funds rate will be set at each FOMC meeting on the basis of what the members of the FOMC believe will best enable us to meet our dual goals of maximum employment and price stability over the course of time.
As the FOMC responds to incoming information, it will continue to be absolutely transparent in explaining its decisions and how and why they contribute to meeting the legally mandated dual goals of monetary policy. That transparency serves three purposes: First, it is required if we are to be accountable to the public; second, it is the best way of ensuring that monetary policy decisionmakers continue to follow sensible and rational policies; and third, it is the best way of informing the private sector of the basis on which monetary policy decisions are made and will continue to be made.
With respect to forward guidance: its role has been and continues to be important in the long period in which eventual liftoff has been the key interest rate decision confronting the FOMC and the focus of market expectations. However, as monetary policy is normalized, interest rates will sometimes have to be increased, and sometimes decreased. Market participants will be able to form their expectations of future interest rates on the basis of three elements: first, the policy record of the FOMC, which might be approximated as a reaction function; second, their analysis of the current economic and financial situation and outlook; and, third, whatever guidance the FOMC will provide as to how it sees monetary policy decisions likely to unfold given the economic situation and outlook. It is likely that explicit long-term forward guidance will play less of a role in monetary policy after liftoff than it has during the past few years.
Policymakers' behavior is sometimes summarized as a reaction function, which can be an algebraic description of how the interest rate is set--for instance, a Taylor-type rule in which the federal funds rate reacts simultaneously to the rate of inflation and expectations of inflation as well as to the rate of unemployment and expected changes in the level of unemployment.21 However, a simple rule of that sort will, by necessity, leave out many factors that appropriately influence monetary policy, such as financial developments, temporary divergences in relationships between different measures of economic activity or inflation, and the like. A simple rule can provide the starting point for the decisions made by the FOMC, but in reaching their interest rate decision, members of the Committee will always have to use their judgment to identify the special circumstances confronting the economy, and how to react to them.
To ensure that monetary policy operates in as stabilizing a way as possible, the FOMC will continue to set out, as clearly as it can, the basis of every decision that it makes, and to provide guidance on its expectations of future decisions. And on the basis of the information provided by the FOMC, of their understanding of the historical record of Fed policy decisions, and of their analysis and expectations of the state of the economy and, particularly, the financial markets, market participants will make the best decisions they can.
»
- 14294 reads
- Printer-friendly version
- Send to friend
- advertisements -
Will we be using our Israeli or US passport today?
>>...to concede that any rate hike will be different than any seen before.<<
Because it will be minuscule
Stan the snake-oil-man going to look interesting in tar and feathers.
They will raise rates the same day my solid gold throbbing thrill hammer busts a nut in Jessica Alba's delicious little balloon knot!
Watch out for the Herp!
(search Jeter herp tree)
Yeah Jeets!
They're going to raise rates by 1/16th or 1/8th of a percent.
From 0.25% to 0.31125% (5/16ths) or 0.375% (3/8ths).
Now that I see it written out they will go for 0.35%
I think not. Be prepared for a shock. Once they do it, they will fuck everyone royally. I'm guessing a 2-3 %-point hike.
So that means you think the Fed prepared to have the Federal budget deficit rise by $360 billion to $540 billion per year? Becuase that's what happens if the nominal Federal debt of $18 trillion experiences an interest rate rise of 2% to 3%. I don't see it happening.
.000025
Ted Cruz says that if you hate Israel, you hate America...so I guess he would say that both passports are the same...
ROTFLMAO... i will Believe it when i SEE it.
So at least 3 hasbara trolls monitoring the comments section, eh?
fuck 'em.
Markets should crash after this speech.
Stan is not the man
And Yellen is a fishmonger.
Dollar Bill is waiting in the public square.
Fire!
More jawboning, what will be different later in the year?
Audit and END the Fed, then execute every motherfucker ever associated with this organization.
The economy will likely be weaker, that's all.
At least he admitted that the Fed understands how it's fucking up the money market and has some plan to deal with that potential disaster. But the rest of it was just windage.
AUDIT and END. But exile maybe, instead of the executions....there's been enough killing the last 15 years.
What a load of bollocks
If we chrome plate that turd things will be wonderful.......
Stan Fisher should gather his Israeli birth certificate, grab his dual passport, and head back to that Tel Aviv de-lux apartment in the sky.
Gefilte fish don't fry in the kitchen
Matzo don't brown on the grill
Maybe he can even get his old job back as head of the Israeli Central Bank!
#NoConflictsOfInterest /s
translation - we don't have a fucking clue what we're doing, we might try to raise rates ONCE AT MOST this year (just to maintain credibility that some think we have), but if we see stocks sell off 5% we'll cut rates back to 0, 10% sell-off and we'll launch QE4, 15% sell-off we'll go NIRP (deep & hard), and a 20% sell-off and we're gonna just start buying U.S. equities hand-over-fist regardless if congress or the president want to "audit or interfere" with our "independence".
They like to short stocks too, like they did in 2008.
Next: All the Fed Governors squeeze into a clown car and wear oversized shoes.
Will the Vatican be releasing some old gold?
Sound like the Fed has no clue what they are doing !!!
Why all the talk, why not raise rates now?? Will 6-9 months really make any difference?? It wont !
What a pathetic place we're in today when the whole investment world waits with baited breath for a simple word.
. . . from liars.
By the time the Fed considers raising rates the whole system will be in obvious ruins. The dollar will be worthless and gold will be many times higher.
When he says "asset purchases by central banks" he means "public debt used to juice fianancial markets".
It is not a recovery, and has nothing do with with supply and demand, nor credit - only DEBT.
The "liftoff"? ROFLMAO! Liftoff to a burger and fries, then the bar!
I'll vote for cash.
Arrest him or die.
guy is full of shit
Jew-fest
Is O.N.R.R.P. QE4?
I was sure it was going to be "Securitized Student Debt Defaults" (S.S.D.D.)?
"Fan chart"? You mean fart? Just put the prime rate at 5% asshole, then jump.
I just thought of a good use for napalm.
Strange how these Dual Citizens are able to talk out of both sides of their mouth.
This guy needs to be deported.
Fed Playbook Rule 666:
Lie and then produce black swan
So the vice chair is more powerful than the chair?
Is that the Dick Cheney school of management?
Good cop / bad cop
This would be really funny if there wasn't so much at stake. They have ZERO intention of raising rates, but they have to keep up the perception that they MIGHT.
Please tell me that people aren't so fucking stupid to fall for this bullshit...
"The approach of liftoff reflects the significant progress we have made toward our objectives of maximum employment and price stability. "
I mean - this is beyond absurd. Fischer works for the owners of the fed reserve banks and for Israel...
but I repeat myself...
http://www.irmep.org/fischer_aipac.htm
Well, we do know why the FED never meets on a Saturday don't we.
The Fed, ECB, BofC etc are dead men walking!
Instead of "chair" and "vice-chair" how about "stool" and "vice stool" -- somehow it seems a better fit.
Cool background music on the live feed, anyone know the composer?
"Although the recovery has been slow, there has been significant cumulative progress."
The cumulative debt is much bigger now. That is significant progress to inflate a credit bubble.
SUMMARY:
Paragraphs 1-4: WE WON! You lost! Super Banker saved the world!
Paragraphs 5-7: In the aftermath of keeping the real interest rate negative for more than two decades, such that real inflation significantly outpaced real interest rates, silly people (and some silly bankers) for some reason decided they could borrow (lend) their way to wealth to the degree that their returns were a ponzi sheme of accelerating borrowing. Who could have realized ahead of time that making borrowing more profitable than savings or production might affect some people that way?
Paragraphs 9-15: We broke the world money-press record. The politicians couldn't write or understand the number of zeros we produced. This process of lowering interest rates by stealing from long term savers and subsidizing irresponsible long term lenders and borrowers saved the system at the expense of...(silence). Our tool uses only carry a slight risk of blowing up the entire world. Almost all of the monetary inflation we created went into foreign markets where eager unscrupulous politicians used it in vote-buying schemes. Everyone except the hoi-polloi were happy with this.
We saved the world better than Superman ever could have dreamed.
Paragraphs 16-18: The politicians are happy. The bankers are happier. The middle class and their spending is shrinking. The underclass is growing. Who knew that underpaid people and people without jobs wouldn't spend as much?
Paragraphs 19: We're gonna raise rates because we think the risks of not raising them are greater than the risks of raising them.
Paragraph 20-25: We're going to control money market rates by manipulating the rate on Excess Reserves. We can create a tsunami of money by lowering it a fraction below the market rate. We can dry up all the liquidity in the world by raising it. In the meantime we can print as much money as we want by paying it as interest on excess reserves. Yay! Bankers will own EVERYTHING! (Note: there's only a tiny 50% chance that we'll blow up the world in the process.)
Paragraph 26-30: Rates won't rise smoothly. They'll go up and down like a pogo stick to satisfy different banking factions.
Pargraphs 31-36: We're in full control now. We will respond to no rules from outside of the banking class. We will respond only to factions of the banking class. So expect monetary chaos as interest rates will look more like an angiogram than a traditional rate. Don't ask us to follow any rules or logical constraints to our policies...because we no longer mind the math of the problem and you no longer matter.
in other words
We can fukin do whatever we want as long as we call it 'our judgement.'
Oh look, two zionist jews of the Federal Reserve conspiring and lying.
._. <----- My shocked face
Fischer mentions the federal funds rate many times, indicating that he continues the thinking and vocabulary of the pre 2007 Fed. But the federal funds rate has ceased to perform as the base rate for US interest rates for seven years as a result of the Fed´s own action in paying interest on excess reserves of the commercial banks (IOER). (This was, incidentally, an enormous gift of taxpayer funds to the commercial banks to help them restore their solvency.) By building up excess reserves, the Fed has relieved the commercial banks of the necessity to scout around among themselves when they wanted to buy or sell these "federal funds." No doubt, the volume of such transactions has decreased enormously as the commercial banks can now use their own reserves whenever needed. I also suspect that the commercial banks have laid off many of their staff who used to operate in the federal funds market, thereby losing their experience and institutional memory. The enormous increase in bank excess reserves, created by the Fed itself, effectively erased the role of required reserves in controlling commercial bank credit extension. Changes to required reserves have not been used by the Fed for a long time, although it continues to be used by other central banks.
Fischer acknowledges that the Fed now has three new tools to use that will affect the level of interest rates. These are its operations in the reverse repo market, the interest it pays on excess reserves and changes to the size of its own balance sheet. It is important to note that the Fed has no experience in the use of these new tools, and the possibility of overshoot or undershoot in attempting to use them is very real. Its traditional operations in the short-term Treasury bill market will have to be conducted with a constant eye on the rate it pays on excess reserves. If it offers treasury bills at a discount to raise interest rates, it may not get any takers until the discount equals or exceeds the rate it is paying on excess reserves. The moribund federal funds market will not re-awaken until reserves are shrunk down to required levels. This will take some time, as the commercial banks learn to live without Fed coddling.