Another Ex-Fed Governor Admits "Only So Much Fed Can Do"
It seems the ability to admit defeat a lack of omnipotence comes with retirement from the Fed. The volume of truthiness from ex-Fed governors is growing and Mark Olson just provided a very succinct summary of why he believes not only is the most recent jobs number not a surprise to the Fed, but the market has already priced in what the Fed could do. Olson sees the odds of QE3 as 50-50 at best, believes changes in the employment picture are rounding errors and not driving Fed decisions on a tick by tick basis, and most critically he notes that "the Fed doesn't want to get into a position of is having to react because of the market anticipation." No matter how much political pressure, the need to keep that QE powder dry for when the stuff really hits the fan seems more prescient and Olson provides color on the limits of Central Bankers as he notes the effect of Fed actions as "the only possible impact it would have would be psychological," and that "they've provided all the stimulus you can do with monetary policy in the absence of anything happening with a better fiscal policy."
Olson begins at 3:20...
It seems increasingly clear that the Fed is cornered and will have to disappoint the market in order to maintain any sense of omnipotence going forward - especially given Olson's view on the jobs data and the limits of monetary policy.
Mark Olson is a former fed governor. welcome to halftime. pleased to be here.
Is the Fed going to do something this week?
I would put it at no better than 50/50 for a couple of reasons; number one, to do anything on a qe-3 would take something like half a trillion dollars worth of investment; also i don't think that the employment number or the unemployment number surprised the Fed at all - that's consistent with what's happening in the economy generally.
What the Fed doesn't want to get into a position of is having to react because of the market anticipation.
On the apparently dismal jobs data as a driver for QE:
As I said, I don't think that number would have been a surprise. Also you have to remember that somewhere between 3.5 and 4 million people leave a job and start a job every month - the difference between the 95 and 130,000 is essentially a rounding error - nothing in that number surprised the Fed.
If the Fed does act, what does the stock market do?
That's your call. i think that's -- the problem is that the market may already have priced in what the fed might do, and that's some place that the Fed does not like to be. They don't like to have to respond because the market moved. The Fed doesn't look at the market move, they look at the underlying economy - a very fundamental difference.
What do you think would be the most effective thing the fed could do. now, you mentioned -- just for the backdrop you mentioned given such a huge, huge qe-3 is probably out of the question. would it be something like not paying banks anything for holding their excess deposits, foring them to lend to get some return on capital or where would they go?
I think that's one of the three options that would make some sense; but i think what else might happen is just a reassurance that in spite of all of the incentives they've put into the marketplace, all of the assistance that they've put into the market, inflationary pressures are still muted. To me that would be the most important thing that they can say and that they would continue to look at other options that they may have to invoke in the future.
You think Fed action would be effective at this point, sir?
Not in terms of its impact on the economy. The only possible impact it would have would be psychological. I don't discount that as having value.
Why would they need to do anything, then, if that's the case?
They really don't, I don't think. I don't think in terms of the underlying impact on the economy, you're now pushing on a string. They've provided all the stimulus you can do with monetary policy in the absence of anything happening with a better fiscal policy.
Mr. Olson, does it not become a problem unwinding this? i heard your number of 500 billion. you threw out a number a couple of months ago of maybe a trillion. doesn't the problem now become it used to be a win/win for the fed. Isn't it now a problem of unwinding if they do do something
There's additional risk to do that. There's no question that will provide additional risk. i think that's one of the other reasons why i think it might not happen. the other thing you have to keep in mind, chairman bernanke will not want a split vote on this next issue. he'll come out of the meetings this week with a consensus one way or the other. i doubt very much he gets a consensus on an aggressive qe-3.
Bernanke thinks he has more fire power. He's clearly made that argument on multiple occasions. are you doubting whether that's true or not?
It's more fire power, but remember he always caveats it with saying that there's only so much you can do with monetary policy. The caveat always is that it only goes so far in the absence of a clear fiscal policy which we're not getting.
Can the fed help the job market?
The fed can help the job market, i think, significantly by the manner in which it just sort of maintains the underlying economy and keeps its eye on inflationary pressure. ... the job number cannot be a function solely of monetary policy.
There's only so much monetary policy can provide. What monetary policy can provide, it has largely done; and the economy is still very soft. What they can possibly do is to do a further rearrangement, perhaps, of the existing portfolio to push longer-term rates out even lower, although they are pretty low right now. But there's only so much you can expect from monetary policy.