The Federal Reserve at 100: Age shall not weary her

America’s central bank has become ever more powerful over the past century

Dec 21st 2013 | From the print edition

[Greg Ip] AS THE holiday season of 1913 drew near, only one thing stood between Woodrow Wilson and a long-awaited vacation on the Gulf of Mexico. Congress was still fighting over a bill to create the Federal Reserve, and Wilson had threatened to keep it in session over Christmas until the bill was ready for his signature.

A century later, the Fed is still overshadowing the festive season: as The Economist went to press, it was meeting to consider curbing its massive purchases of government bonds. What is more, the debate over its role is as febrile as ever. To succour the economy, it has in recent years bailed out chunks of Wall Street and taken on new oversight of the financial system, in addition to accumulating over $3 trillion in bonds. Many, including one of its former chairmen, Paul Volcker, worry that the Fed is “getting too big for its breeches”.

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Explaining the bond market selloff: Traders versus economists

Jul 11th 2013, 21:34 by G.I. | WASHINGTON, D.C.

Traders and economists both spend their days studying markets, yet I’m struck by how differently they approach the subject. Since traders profit from finding mispricings, they are biased to believe that prices are more often wrong than right. Fundamentals matter, but traders believe they are routinely overwhelmed by psychology, liquidity and other non fundamental factors.
Economists, by contrast, grow up believing prices are usually right. The intersection of  supply and demand curves explains in elegant, intuitive and internally consistent fashion how each individual buyer and seller can have a different idea of what a price should be, yet their interactions collectively yield a single, objectively correct price. Economists don’t dispute the role of psychology – they’ve handed out Nobel prizes for precisely that – but the organizing principle of their lives is that market prices are usually an unbiased distillation of fundamental determinants.
These different world views help explain why traders have always been suspicious of quantitative easing (QE) and economists dismissive of those suspicions.

America’s monetary policy: Tinker, taper

The Federal Reserve tries to clarify its goals

Jun 22nd 2013 | WASHINGTON, DC |From the print edition“HE’S already stayed a lot longer than he wanted.” Barack Obama’s remark in a TV interview this week fuelled speculation that Ben Bernanke, whose second term as Federal Reserve chairman expires early next year, would soon leave the central-banking game. As Mr Bernanke laboured to communicate the Fed’s goals to journalists on June 19th, after the close of its policymaking committee’s latest meeting, who could blame him for longing to return to academia?

Since the Fed’s main policy interest rate fell to near zero in December 2008 it has deployed a complex array of “unconventional policies” to boost the economy. The Federal Open Market Committee this week ostensibly kept its foot on the gas. It promised to keep adding $85 billion in bonds per month to a stash that has almost quadrupled to $3.4 trillion since the beginning of the recession. It also pledged to keep short-term interest rates near zero.

Free exchange: Macro control, micro problems

History shows the limits of macroprudential policy in curbing dangerous risk-taking

Jun 1st 2013 |From the print edition
[Greg Ip] AMERICA’S Federal Reserve faces a dilemma: to put the economy back on its feet it is keeping interest rates at zero and buying bonds; but in doing so, it worries, it is egging on dangerous risk-taking. Cue “macroprudential” policy. In theory, central banks would use regulatory and supervisory authority to stamp out excesses in specific markets while leaving monetary policy to take care of inflation and employment.

History suggests this is easier said than done. “Macroprudential” may be new jargon, but America has tried variants of it for decades, from credit controls to down-payment limits. And the record is not a ringing endorsement for macroprudential policy, according to a new working paper by Douglas Elliott of the Brookings Institution, Greg Feldberg of America’s Treasury Department and Andreas Lehnert of the Fed.

The week in American monetary policy: Parsing the Federal Reserve

May 24th 2013, 18:39 by G.I. | WASHINGTON, D.C.

The Federal Reserve left a lot of people scratching their heads this week. Between Chairman Ben Bernanke’s testimony, and the release of the minutes to the May 1^st Federal Open Market Committee, investors were struggling to figure whether an end to easy monetary policy was nigh. A headline in today’s The Wall Street Journal declares: “In Bid for Clarity, Fed Delivers Opacity.” Here is what I think is essential to understand about what the Fed is doing, what we learned this week, and why more crossed signals are likely ahead.

1. The Fed has two exits to manage, not one.

The Federal Reserve speaks: Fearful symmetry

May 1st 2013, 21:45 by G.I. | WASHINGTON, D.C.

THE Federal Reserve, as widely expected, stood pat today, reaffirming its commitment to near zero interest rates until unemployment fell to 6.5% or lower, and continuing to buy $85 billion of Treasury and mortgage-backed bonds until the jobs market improved substantially.

But its otherwise ho-hum statement jolted markets with this new line: “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.”

The Fed’s new thresholds: The mandate is willing but the tools are weak

Dec 13th 2012, 2:00 by G.I. | WASHINGTON, D.C.

[Greg Ip] Low inflation and full employment have been statutory goals of the Federal Reserve since 1977, but its officials always felt more comfortable with the first than the second. After all, in theory monetary policy can’t alter unemployment in the long run.

But the stubbornly weak economy of recent years prompted some at the Fed to question their historical neglect of the second half of their mandate. “The Fed’s dual mandate … has the force of law behind it,” Charlie Evans, president of the Federal Reserve Bank of Chicago, said in September, 2011.  “So, if 5% inflation would have our hair on fire, so should 9% unemployment.”

Monetary policy, the unintended consequences: QE through the looking glass

Nov 29th 2012, 21:37 by G.I. | WASHINGTON, D.C.

Even if you follow central banking, you may not have heard much about Jeremy Stein. He’s a highly regarded finance economist from Harvard University who became a governor this year, and since then he has given only one speech. But judging by the contents of that speech, Mr Stein’s profile seems bound to grow.

The subject of the speech was the Fed’s large scale asset purchases (LSAPs), colloquially known as quantitative easing (QE). It had none of the tantalizing hints about coming Fed actions that attract headlines. Rather, it mucked about in dark, abstruse corners of corporate finance, devoting three of its 19 pages to academic references.

America’s economy: Cliffhanger (leader)

Ben Bernanke has done his bit to help the American economy. Now the politicians must do theirs

Sep 22nd 2012 | from the print edition

EVEN by the standards of a weak recovery, America’s economy has looked frail lately. Growth has sunk below 2%. Unemployment is stuck above 8%. Factory activity seems to be shrinking. Yet there is no mistaking the green shoots of optimism, in particular on Wall Street: the stockmarket has hit its highest level since 2007. Consumer confidence is edging up, and along with it approval of Barack Obama, raising his odds of re-election even before Mitt Romney’s gaffes (see article).

Give credit to central bankers and their printing presses for the improving mood.

The Federal Reserve launches QE3: The power of positive thinking

Sep 13th 2012, 21:11 by G.I. | WASHINGTON

[Greg Ip] Earlier this year, the Federal Reserve reached a crossroads. It had lowered short-term interest rates to zero and promised to keep them there until 2013, and then 2014. It had undertaken multiple rounds of bond purchases to lower long-term interest rates. Yet the recovery was actually losing steam; unemployment had stopped falling. Was there anything left to try?

The answer, it turns out, is yes.