US monetary policy USA – Bernanke lays out the four cardinal points of the Fed’s compass: housing, labour market, inflation, growth.
– In presenting the Monetary Policy Report to Congress, Bernanke reiterated the message sent in past weeks.…
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following the June FOMC. Monetary policy remains, and will have to remain for an extended period of time, highly accommodative, and is not managed in autopilot mode. Economic developments may prompt a change in the monetary policy path, for instance triggering new asset purchase increases even once the tapering process has begun. The Chairman highlighted the four economic variables on which the Fed is focusing to assess the continuation and sustainability of the recovery, which has continued at “a moderate pace despite the strong headwinds created by federal fiscal policy”.
– 1) Residential construction is one of the key sectors for the recovery: activity and prices in the sector should keep growing despite the rise in mortgage rates, but it will be important to “monitor developments in this sector carefully”. The key point for Bernanke is that the real estate sector keep growing: should the Fed consider expansion of the sector to be threatened by any increase in mortgage rates, it will have to put in place further measures on the monetary side. 2) The labour market is still improving “gradually”. Bernanke stressed that the unemployment rate has dropped by half a percentage point since the beginning of the asset purchase programme (September 2012), and employment continues to grow at a satisfactory, pace adding close to 200k jobs a month. However, conditions remain markedly unsatisfactory, as overall and long-term unemployment are still “much too high”. Labour market developments will be assessed flexibly: for instance, “if reductions in measured unemployment were judged to reflect cyclical declines in labour force participation […] the Committee would be unlikely to view a decline in unemployment to 6.5% as a sufficient reason to raise its target for the federal funds rate”. 3) Inflation remains below the longer-run objective of 2%. The FOMC believes this is in part due to transitory factors. However, the Committee is aware of the fact that excessively low inflation implies risks to the economy, and will also monitor this variable closely, acting “as needed to ensure that inflation moves back toward the 2% objective”. 4) Lastly, growth. The FOMC expects growth to accelerate as of the second half of 2013, levelling off at between 2.9% and 3.6% in 2015. The expected acceleration should also be aided by the gradual easing of fiscal tightening and the expansive effects of extremely accommodative financial conditions. In the past year, growth and unemployment seem to have decoupled: the unemployment rate has kept dropping despite a relatively weak growth trend: in order to confirm the sustainability of the labour market, the Fed is waiting to see a more solid evolution of the recovery, also in order to reduce downside risks deriving from unexpected shocks.
– The FOMC considers it appropriate to keep monetary policy “highly accommodative” for the “foreseeable future”. Bernanke reasserted the distinction between the tools represented by the Fed’s securities portfolio and forward guidance on rates. The asset purchase programme and the size of the Fed’s balance sheet are instruments with which to support growth in the short term, through the improvement in labour market conditions. The pace of purchases could moderate “later this year” in “measured steps”, and the program could be terminated around mid-2014, when the unemployment rate should be “in the vicinity of 7%” and inflation would be moving toward 2%. In any case, asset purchases are “by no means on a preset course” and monetary policy will respond to both upside and downside deviations.
– We confirm our forecast for a reduction in the pace of asset purchases in September, with the size of the Fed’s balance sheet being kept unchanged until the end of 2015, when the securities will reach maturity and the Fed will have started hiking rates. Economic data releases over the summer will be crucial in guiding monetary policy developments, even more so than they have been to date.
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