The Invisible Mouth: Fed Easing More Likely in November
By James Padinha Economics Correspondent
Closer?
JACKSON HOLE, Wyo. -- Chicago Federal Reserve Bank President Michael Moskow and Cleveland Federal Reserve Bank President (and current FOMC voter) Jerry Jordan both speak tomorrow, but that is the last we will hear from Fed members before they meet to vote on the funds rate next Tuesday. (The Fed sticks to a [roughly] two-week blackout period surrounding each FOMC meeting.) Herewith the latest Fed quotables:
*Richmond Federal Reserve Bank President J. Alfred Broaddus: "There was a time earlier, back in the middle of the summer, when many of us were concerned with upside risk in the economy. Many of us thought the risks were on the upside, now most of us see the risks are more balanced. Certainly the reason for the greater degree of balance is the international situation. The particular event that has been seminal in all of this was the Russian default. It has raised risk premiums in capital markets dramatically. In the short run it may mean lower interest rates, which might even have a stimulatory effect on the U.S. economy. What we don't know and can't know is how much of a negative impact all of this other turmoil in the international economy is going to have on the U.S. economy."
*St. Louis Federal Reserve Bank President William Poole: "Many are calling on the Fed to reduce interest rates to calm the market. Some argue that cutting rates in the United States will promote a more healthy financial and growth environment abroad, will ease the pressing financial problems in Russia, and so forth and so on. The fact of the matter is that with one policy instrument, the Federal Reserve cannot do all of these things. . . If financial turmoil in the world threatens to depress the U.S. economy, then adjustment of U.S. monetary policy is appropriate, and the Fed will make that adjustment when the case for it is clear. Still, there is in the FOMC a very deep commitment by all to pursue price stability. That is the bedrock principle that guides our policy decisions. . . If the situation were perfectly clear, the Federal Reserve would already have adjusted rates."
*Federal Reserve Governor Roger Ferguson: "Earlier this year I was more concerned about the risks of inflation. Now risks are more balanced. I will be looking at incoming data very closely and seeing if risks start to move slightly in a way that's different from where I see it today."
*Federal Reserve Governor Edward Gramlich, asked if he still believed, as he said less than 48 hours earlier, that inflation is still more of a threat than deflation: "Yes. I haven't changed in two days."
Assume Greenspan is inclined to go next week. Can he convince FOMC voters like Poole and Ferguson and Gramlich to vote for an easing so soon? (You can always find a list of current FOMC voters at the Fed web site.)
Poole recently noted that the wealth effect may wind down only with a long lag. He also mentioned that the Fed would be looking at the employment cost index -- but third-quarter numbers won't be released until Oct. 29. (The FOMC next meets on Nov. 17). Meanwhile, Gramlich is obviously not ready to go.
Ferguson recently noted that the Fed is pre-emptive on the way down. But FOMC members never have much faith in their forecasts.
Last year, on a fourth-quarter-to-fourth-quarter basis, gross domestic product grew 3.8%; the Fed laid out a central tendency forecast of 2.0% to 2.8% for this year as recently as July. Yet many members, despite repeated acknowledgements that the U.S. cannot remain an oasis of prosperity, still seem to want to see some hard evidence of a material economic slowdown (especially in final demand). There exists a marked degree of uncertainty in the first three bullets above, for example, and Greenspan himself surely feels that the economy has suffered only minimal damage to date (recall his "erosion at the edges" comment).
By waiting until November to move, then, Greenspan does himself two favors. One, he can soften up the hawks next week. That means telling them (politely) that yes, things are uncertain -- but also that there is relatively little risk in easing at the next meeting. Two, everyone gets to see more numbers. That means two more employment reports, two more NAPM PMIs, an employment cost index, and a third-quarter GDP number (including a decent read on what consumption is likely to do during the fourth quarter). It stands to reason that Greenspan's internal traffic light would flick to green from yellow on unambiguous weakness in any three (or more) of these indicators.
And it goes without saying that one ought to clear the intersection quickly if the world shakes violently enough to send share prices screaming sharply lower.