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November 16, 2009

Economist's View - 5 new articles

"Sudden Financial Arrest"

Ricardo Caballero says that when there is a sudden failure of the financial system, governments should not let "fuzzy moral hazard reasoning" stop them from providing "massive" amounts of "credible public insurance and guarantees to financial transactions and balance sheets." He argues that "it is neither credible nor desirable to refuse to assist the private sector":

Sudden financial arrest, by Ricardo Caballero, Vox EU: "Sudden cardiac arrest (SCA) is a condition in which the heart suddenly and unexpectedly stops beating. When this happens, blood stops flowing to the brain and other vital organs…. SCA usually causes death if it's not treated within minutes…." – US National Institute of Health
There are striking and terrifying similarities between the sudden failure of a heart and that of a financial system. In the medical literature, the former is referred to as a sudden cardiac arrest (SCA). By analogy, I refer to its financial counterpart as a sudden financial arrest (SFA).
When an economy enters an episode of SFA, panic takes over, trust breaks down, and investors and creditors withdraw from their normal financial transactions. These reactions trigger a chain of events and perverse feedback-loops that quickly disintegrate the balance sheets of financial institutions, eventually dragging down even those institutions that followed a relatively healthy financial lifestyle prior to the crisis. In this article I draw on the parallels between SCA and SFA to characterize the latter and to argue that a pragmatic policy framework to address SFA requires a much larger component of systemic insurance than most policymakers and politicians currently support.
Risk factors and preventive medicine
An important risk factor behind SCA is coronary artery disease, and the front line for its prevention is a healthy lifestyle. However, the medical profession is keenly aware that people make poor choices regardless of warnings and that even those who do adopt a healthy lifestyle and have no known risk conditions may still experience a fatal SCA episode. The pragmatic response to these facts of life is to complement preventive healthy lifestyle guidelines and advise with an effective protocol to prevent death once SCA takes place. The main (and perhaps only) option to treat SCA once triggered is the use of a defibrillator. Moreover, the window of time for this treatment to be effective is very narrow, just a few minutes, making it crucial to have defibrillators readily available in as many places as is economically feasible.
Need for a financial defibrillator and fuzzy moral hazard reasoning
Unfortunately, the pragmatic approach followed by the medical profession in reducing the risk of death associated with SCA contrasts sharply with the stubborn reluctance to supplement the financial equivalent of policies reducing coronary artery disease-risk (mostly regulatory requirements) with an effective financial defibrillator mechanism. The main antidote to SFA is massive provision of credible public insurance and guarantees to financial transactions and balance sheets. In this analogy, these are the financial equivalent of a defibrillator.
The main dogma behind the great resistance in the policy world to institutionalize a public insurance provision is a fuzzy moral hazard argument: If the financial defibrillator were to be implanted in an economy, the argument goes, banks and their creditors would abandon all forms of healthy financial lifestyle and would thus dramatically increase the chances of an SFA episode.
This moral hazard perspective is the equivalent of discouraging the placement of defibrillators in public places because of the concern that, upon seeing them, people would have a sudden urge to consume cheeseburgers, since they would realize that their chances of surviving an SCA had risen as a result of the ready access to defibrillators.
But actual behavior is not so forward-looking and rational. People indeed consume more cheeseburgers than they should, but this is more or less independent of whether defibrillators are visible or not. Surely, there is a need for advocating healthy habits, but no one in their right mind would propose doing so by making all available defibrillators inaccessible. Such policy would be both ineffective as an incentive mechanism and a human tragedy when an episode of SCA occurs.
By the same token, and with very few exceptions (Fannie and Freddie?), financial institutions and investors in bullish mode make portfolio decisions that are driven by dreams of exorbitant returns, not by distant marginal subsidies built into financial defibrillators. Nothing is further from these investors' minds than the possibility of (financial) death, and hence they could not ascribe meaningful value to an aid which, in their mind, is meant for someone else. This is simply the other side of the risk-compression and undervaluation during the boom phase. Logical coherence dictates that if one believes in this undervaluation, then one must also believe in the near-irrelevance of anticipated subsidies during distress for private actions during the boom.
Of course, once the crisis sets in, insurance acquires great value and leads to more risk-taking and speculative capital injections into the financial system, but by then this is mostly desirable since the main economy-wide problem during a financial panic is too little, not too much, risk-taking. The last thing we need at this time is for creditors to panic and shortsellers to feast, as they suddenly realize that financial institutions can indeed fail from self-fulfilling runs, fires sales, and liquidity dry-ups, for which there is no counteracting policy framework in place aside from ill-timed "market discipline" or high-risk surgery. Indeed, attempting to "resolve" a large and interconnected institution in the middle of a panic, when asset prices are uninformative and hence "resolution" decisions are largely arbitrary, carries the serious risk of adding fuel to the fire (panic).
What to do when SFA occurs
In any event, when SFA does take place, it becomes immediately apparent to pragmatic policymakers that there is no other choice than to provide massive support to distressed institutions and markets, but since the channels to do so are not readily available, precious time and resources are wasted groping for a mid-crisis response (recall the many flip-flops during the early stages of the TARP implementation). If one is of the view (which I am not) that hubris plays only a small role during the boom and instead it is all about incentive problems due to anticipated subsidies during distress, then one must believe that savvy bankers and their creditors anticipate intervention anyway. Hence the incentive benefit of not having financial defibrillators readily available does not derive from the absence of a well designed ex ante policy framework but from the real risk that improvised ex post interventions may fail to be deployed in time to prevent death from SFA. This logic seems contrived at best as the foundation for a policy framework that does not include readily available financial defibrillators.
SFAs will continue to occur regardless of regulation
In summary, it is a fact of life, and of cognitive distortions, financial complexity, and innovation in particular, that SFA episodes will continue to happen regardless of how much regulatory creativity policymakers may muster. The absence of a financial defibrillator is a very weak incentive mechanism during the boom phase and a potential economic tragedy during a financial crisis. We need a more pragmatic approach to SFA than the current monovision coronary-artery-disease-style, hope-for-the-best, approach. We need to endow the policy framework with powerful financial defibrillators.
Modern economies already count on one such device in the lender of last resort facility housed at the central bank, but this has clearly proven to be insufficient during the recent crisis. I discuss three supplements to this facility:
  • Self insurance, which is where policymakers' instinct lies. In the current context this is reflected in a call for higher capital adequacy ratios, especially for systemically important financial institutions.
  • Contingent capital injections, which is where most academics' instinct lies. The basic idea is to reduce the costs associated with holding capital when is not needed. Proposals primarily differ on whether the contingency depends on bank-specific or systemic events, and on whether the source of capital is external to the distressed bank or internal (as in the debt-convertibility proposals).
  • Contingent insurance injections, which is the most cost effective mechanism for the panic component of SFA. The basic idea is that the enormous distortion in perceived probabilities of a catastrophe during panics can be put to good use since economic agents greatly overvalue public insurance and guarantees. Providing these can be as effective as capital injections in dealing with the panic at a fraction of the expected cost (when assessed at reasonable rather than panic-driven probabilities of a catastrophe).
In practice, there are good reasons to have in place some of each of these types of mechanisms. For normal shocks, it is probably easiest to have banks self- and cross-insure. For large shocks, there is always a fundamental component, which is probably best addressed immediately with contingent capital (private at first and in extreme events, public). However, the large panic component of an SFA episode requires large amounts of guarantees, which would be too costly and potentially counterproductive (if they add to the fear of large dilutions) to achieve through capital injections. For this component, a contingent-insurance policy is the appropriate response.
One particularly flexible form of a contingent insurance program is the Tradable Insurance Credits proposed in Caballero and Kurlat (2009a). These act as contingent (on systemic events) CDS to protect banks' assets against spikes in uncertainty. They are a (nearly) automatic, pre-paid, and mandated mechanism to ring-fence assets whose price is severely affected by SFA, as it was done ex post in the US for some Citibank and Bank of America assets and was offered more broadly in the UK.2
The international dimension
The international dimension of SFA adds its own ingredients. I focus on the problem for emerging markets which has a close parallel with the issues faced by the financial sector within developed economies.
For emerging markets, it is often the case that the sovereign itself becomes entangled in the crisis as the main shortage is one of international rather than (just) domestic liquidity. Most policymakers in emerging economies are acutely aware of this danger, which is one of the main reasons they accumulate large amounts of international reserves. However, large accumulations of reserves are the equivalent to self-insurance for domestic banks – they are costly insurance facilities. For this reason, many of us have advocated the use of external insurance arrangements, and the IMF has spent a significant amount of time attempting to design the right contingent credit line facility.
In the full paper from which this column is drawn, I propose a system akin to the Tradable Insurance Credits but aimed at supporting the value of emerging market new and legacy emerging debt during global SFA episodes. I refer to these instruments as E-TICs and envision them as being controlled by the IMF rather than by the US or other developed economies' governments.3
Editor's note: This column is drawn from Ricardo Caballero's Mundell-Fleming Lecture, delivered at the Tenth Jacques Polak Annual Research Conference, IMF, 5-6 November 2009.
Footnotes
1 One way to get a sense of how much the market values the "too big to fail" insurance provided by the government is to compare the cost of funding for small and large banks. Baker and McArthur (2009) compare the average costs of funding for banks with more than $100 billion in assets to the average costs for banks with less than $100 billion. They find that between the first quarter of 2000 and the fourth quarter of 2007, the large banks' costs were 0.29 percentage points lower than the small banks, averaging across time. Between fourth quarter 2008 and second quarter 2009, the spread increased to 0.78 percentage points. Clearly, there are many reasons why larger and smaller banks can have different costs of funding: different types of assets, different amounts of leverage, and so on. Baker and McArthur (2009) take the difference between these spreads, 0.78 minus 0.29, as a crude upper-bound on the subsidy associated with the solidification of the "too big to fail" policy after Lehman's collapse. I would suggest an alternative interpretation: During boom times, the "too big to fail" insurance was there but of little importance, while during the crisis, it became much more important and probably a source of stability.
2 It turns out that the Bank of America deal was never signed, but the perception that it had been was enough to contain the panic. The UK system was less successful in terms of the takers than it would have been socially optimal because it was voluntary and very expensive. Both aspects would be improved by the Tradable Insurance Credits framework.
3 For developed economies, the international liquidity shortage problem is much less significant and it was appropriately dealt with the swap arrangements between major central banks. These should remain in place, at least on a contingent (to SFA) basis. A more delicate problem for these countries stems from the high degree of cross-borders interconnectedness of their financial institutions and the potential arbitrage and free riding issues that may emerge from differences in the type of financial defibrillators available. This raises international coordination issues which I don't develop in this paper but that obviously need to be addressed.
References
Baker, Dean and Travis McArthur (2009), "The Value of the 'Too Big to Fail' Big Bank Subsidy." Center for Economic Policy and Research Issue Brief. September.
Caballero, Ricardo J. and Pablo Kurlat (2009), "The "Surprising" Origin and Nature of Financial Crises: A Macroeconomic Policy Proposal." Prepared for the Jackson Hole Symposium on Financial Stability and Macroeconomic Policy, August.


How to Prevent the Next Financial Crisis

At MoneyWatch:

How to Prevent the Next Financial Crisis, by Mark Thoma


Paul Krugman: World Out of Balance

Paul Krugman reiterates that China's currency policy must change:

World Out of Balance, by Paul Krugman, Commentary, NY Times: International travel by world leaders is mainly about making symbolic gestures. Nobody expects President Obama to come back from China with major new agreements, on economic policy or anything else.
But let's hope that when the cameras aren't rolling Mr. Obama and his hosts engage in some frank talk about currency policy. For the problem of international trade imbalances is about to get substantially worse. And there's a potentially ugly confrontation looming unless China mends its ways. ...
Despite huge trade surpluses and the desire of many investors to buy into this fast-growing economy — forces that should have strengthened the renminbi, China's currency — Chinese authorities have kept that currency persistently weak. They've done this mainly by trading renminbi for dollars, which they have accumulated in vast quantities.
And in recent months China has carried out what amounts to a beggar-thy-neighbor devaluation, keeping the yuan-dollar exchange rate fixed even as the dollar has fallen sharply against other major currencies. This has given Chinese exporters a growing competitive advantage over their rivals, especially producers in other developing countries.
What makes China's currency policy especially problematic is the depressed state of the world economy. ... China's weak-currency policy exacerbates the problem, in effect siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters.
But why do I say that this problem is about to get much worse? Because for the past year the true scale of the China problem has been masked by temporary factors. ...
That, at any rate, is the argument made in a new paper by Richard Baldwin and Daria Taglioni of the Graduate Institute, Geneva. As they note, trade imbalances, both China's surplus and America's deficit, have recently been much smaller than they were a few years ago. But, they argue, "these global imbalance improvements are mostly illusory — the transitory side effect of the greatest trade collapse the world has ever seen."
Indeed, the 2008-9 plunge in world trade was one for the record books. What it mainly reflected was the fact that modern trade is dominated by sales of durable manufactured goods — and in the face of severe financial crisis and its attendant uncertainty, both consumers and corporations postponed purchases of anything that wasn't needed immediately. How did this reduce the U.S. trade deficit? Imports of goods like automobiles collapsed; so did some U.S. exports; but because we came into the crisis importing much more than we exported, the net effect was a smaller trade gap.
But with the financial crisis abating, this process is going into reverse. Last week's U.S. trade report showed a sharp increase in the trade deficit between August and September. And there will be many more reports along those lines.
So picture this: month after month of headlines juxtaposing soaring U.S. trade deficits and Chinese trade surpluses with the suffering of unemployed American workers. If I were the Chinese government, I'd be really worried about that prospect.
Unfortunately, the Chinese don't seem to get it: rather than face up to the need to change their currency policy, they've taken to lecturing the United States, telling us to raise interest rates and curb fiscal deficits — that is, to make our unemployment problem even worse.
And I'm not sure the Obama administration gets it, either. The administration's statements on Chinese currency policy seem pro forma, lacking any sense of urgency.
That needs to change. I don't begrudge Mr. Obama the banquets and the photo ops; they're part of his job. But behind the scenes he better be warning the Chinese that they're playing a dangerous game.


Fed Watch: Should the Fed Be Doing More?

Tim Duy:

Should the Fed Be Doing More?, by Tim Duy: 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 have 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.


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