By Brai Odion-Esene
WASHINGTON (MNI) – President Barack Obama’s nominees to the Federal
Reserve Board told a Senate panel Tuesday their decisions on the right
time for the Fed to begin withdrawing its monetary stimulus would be
dictated by conditions in the economy, and not a fixed date.
“At the broadest level I would want to be guided by the Fed’s dual
mandate,” Harvard professor Jeremy Stein during a nomination hearing by
the Senate Banking Committee, adding the key is to monitor both economic
and inflation data.
Jerome Powell, the other nominee and a former Treasury
undersecretary under President George H.W. Bush, said the timing of the
Fed’s switch to policy tightening “is a critical, critical question.”
“It has to be weighed under the dual mandate, of which both aspects
are equal,” Powell added.
The Fed’s policymaking Federal Open Market Committee has said it
expects economic conditions will likely warrant short-term interest
rates remaining at historic lows through to late-2014.
“My understanding and my interpretation of that, is that’s not a
committment on the part of the Federal Reserve,” Stein said. So if the
economic situation were to change, for example strengthening faster than
expected, he said it would be warranted to revisit the path of the
easing — “guided by the dual mandate.”
Powell pointed to the “reaction function” released by the FOMC
following its January meeting — “which is to react in a balanced and
symmetrical way” — and said he would certainly be bound by that.
He added that it is not possible to set a date now for when
tightening will begin, rather “it’s going to depend on the future path
of the economy.”
Stein said he believes both pillars of the Fed’s mandate — maximum
employment and price stability — are on an equal footing and argued
that on this occasion, both goals are likely to be complementary.
“As the economy strengthens it will both tend to push inflation up
and to push employment up as well, so you’ll be moving in the same
direction of converging on both the two goals,” he said.
Right now, however, Stein said the Fed is maintaining its highly
accommodative policy because they are pushing against “a relatively
strong headwind” from the housing market.
Powell agreed the Fed’s stimulus is not having the desired effect
because of the housing market’s struggles.
“You can see them wracking their brains about ways to help the
housing market, if there were a silver bullet I think we would have used
it by now,” he said.
The timing of the Fed’s exit from its balance sheet, and its highly
accommodative policy, is “one of the most critical questions that we
would face if confirmed at the Fed,” Powell said.
Powell disagreed with the assertion of the committee’s ranking
member, Sen. Richard Shelby, that the Fed has yet to lay out its plans
to withdraw the massive amounts of monetary stimulus it has injected.
“In the June 2011 (FOMC) minutes they announced a plan and they
sort of announced a series of steps that they would take … ending with
asset sales,” he said.
Powell went on to describe the scale of the Fed’s eventual exit as
“unprecedented and terribly important,” while also warning of the
“tremendous risk” involved.
“You run the risk of inflation — disturbing inflation
expectations, asset bubbles and all of that,” he said.
The timing of the exit will also be key, Powell said, cautioning
that beginning too early risks snuffing out a recovery that remains
weak, while withdrawing the stimulus too late could unleash inflation.
Stein agreed with his fellow nominee, calling the Fed’s wind down
of its balance sheet “one of the most important tasks for the Fed over
the next several years for sure.”
He noted that the Fed on a number of occasions has been very good
about increasing its transparency.
“My guess is that as the moment gets closer, it will be important
to start letting markets know the tactics — the tactical level of
decisions and how things will evolve,” Stein said.
Stein stressed his committed to being transparent, and the
importance of not disrupting financial markets by unwinding the Fed’s
balance sheet “in an unexpected way.”
The Fed’s seven-member Board of Governors has two vacancies. While
the term of Elizabeth Duke, an appointee of President George W. Bush,
expires Jan. 31, she can continue to serve until a successor is
appointed.
** MNI Washington Bureau: 202-371-2121 **
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