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Weekly Economic Commentary


Insights from Two Voting Members of 2012 FOMC

February 8, 2012

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President John Williams of the San Francisco Federal Reserve Bank, a voting member of the FOMC in 2012, presented his views about the economy and Fed policy today, which contain several important nuggets of information, particularly given the new information from the Fed following the January 24-25 FOMC meeting.

He indicated explicitly that he is a 2014 Club member, not a surprise because this information was part of the FOMC policy statement. His remarks touched on several aspects that are fuzzy despite the effort to increase transparency of the Fed’s views. The highlights of his comments are summarized below.

First, he expressed discomfort with tying Fed policy to a calendar date and noted that it is difficult to link Fed policy to economic conditions. We can infer that the Fed has opted for the calendar date as a suitable alternative but has economic conditions in mind, implying that bullish economic data could advance the date when the Fed will tighten monetary policy. The extension of the first round of firming to late 2014 is indicative of the central banks unconditional support for a complete economic recovery.

Second, he reiterated Bernanke’s observation that more policy support will be necessary if economy loses momentum and inflation stays well below 2.0%.

Third, in the context of more policy accommodation, President Williams noted that it is not a “slam dunk” and that the Fed is in a “close-call” space. In particular, he stressed that if economic growth is not strong enough to lower the unemployment at a sustained pace, the case for QE3 would be strong.

Fourth, he answered questions about the type of accommodation the Fed may provide. He held the view that the Fed is most likely to purchase mortgage-backed securities. Also, the program is predicted to be a flexible program in terms of size and time frame compared with QE1 and QE2, both of which had a preannounced size and fixed time frame of operation.

Fifth, Williams repeated that the Fed has tools and know-how to “take the punch bowl” away when necessary.

At the same time another voting member, President Lacker of the Richmond Federal Reserve indicated today that new monetary policy accommodation is not necessary, given the nature of incoming economic data. President Lacker dissented at the January meeting because he would have preferred to omit the description of the time period during which the federal funds rate would be retained at the current level. Well, we have two different opinions from two voting members in the 2012 FOMC.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.