Jerome Powell – President of the Federal Reserve

Jerome Powell nomination as President of the Federal Reserve has not created a disruption *. He was in Janet Yellen’s line on macroeconomics and on monetary policy. Nevertheless he is perceived as more market friendly on regulation than Yellen. He is perceived as someone who will maintain low interest rates and that will modify financial and banking regulation. For this he cannot be wrong in the eyes of financial investors in Wall Street. It’s also an agenda that is consistent with the White House wishes on monetary policy.

But we cannot stop here the analysis. He is not a specialist of monetary policy at a moment where the Fed is normalizing its monetary policy. The Fed is beginning an extraordinary process that consist of increasing interest rates, shrinking the size of its balance sheet and maintaining the low unemployment rate and an inflation rate close to 2%. Being able to satisfy all these objectives is and will be the most difficult task for a central banker.
It can be a terrible task for someone who is not a specialist of the monetary policy theory as Bernanke and Yellen were. Why? Because the economy has shocks positive or/and negative and that there is a need for a rapid adjustment of the monetary policy.
Until now Powell has followed the trajectory decided by Yellen. What will happen when he will have to create the trajectory? The success of the Fed depends a lot on what its president does. We know that the personality of the president of a central bank is key in the credibility of the monetary policy and in the way it is conducted. We’ve seen that in the Euro Area with the nomination of Draghi that has completely changed the picture and probably saved the Eurozone. Continue reading

Are the Fed’s interest rate projections credible?

At the FOMC meeting on September 19 and 20, members charted the central bank’s so-called dot plot of expected rates for the years out to 2020, involving one interest rate hike in 2017, three in 2018, two in 2019 and only one in 2020, leading to an end figure of 2.875% vs. 1.125% currently. These figures published by the Fed are generally extreme, as the US central bank endeavors to influence investors’ expectations to suit its own narrative. Continue reading

The Fed normalizes its monetary policy but is not optimistic

As expected, the Federal Reserve has decided to start the process of reducing the size of its balance sheet. It will start next month in October. Details of the operation were presented in June and are available on a post send earlier today.

During her press conference, Janet Yellen has clearly announced the hierarchy between the two instruments the Fed can use to manage its monetary policy. The main instrument remains the fed fund interest rate. In “normal” time, this is the instrument that must be used by the FOMC to manage its monetary policy. The purchases of assets could become again an instrument for the Fed if the situation is exceptional. The interest rate is the rule and the assets’ purchase is the exception. But it was a relevant question as the current level of the fed fund is too low to have a strong impact on the economic activity in the case of a negative shock. A quantitative adjustment could be necessary. Janet Yellen sees a kind of complementarity between the two and the two instruments must remain in the central banker toolbox.  Continue reading

The US Federal Reserve in unknown territory

Written with Aline Goupil-Raguénès

During today’s meeting, the probability is high that the Federal Reserve will decide to reduce the size of its balance sheet.
This latter started to increase at the end of 2008, first when the Fed was a provider of liquidity to the banking sector, and second when the US central bank started to purchase assets on a large scale. Few figures will give the scale of the transformation; in 2007 on average the size of the balance sheet was USD 830bn, it is now close to USD 4 500bn. As percentage of GDP the change is impressive from 5.7% on average in 2007 to 23% during the second quarter of this year.
Many questions are associated with this new step in the normalization of the US monetary policy. That’s the reason of this post and of the attached detailed document which is more technical but also more precise on the way it will work. Continue reading