Finalist: The Wall Street Journal, by Jon Hilsenrath
For his exploration of the Federal Reserve, a powerful but little understood national institution.
Nominated Work
July 29, 2013
By John Hilsenrath and Kristina Peterson
As the U.S. emerged from recession in the summer of 2009, Janet Yellen, then president of the Federal Reserve Bank of San Francisco, took a grim view of the economy's prospects.
"I expect the pace of the recovery will be frustratingly slow," she said in a San Francisco speech. A month later, addressing fears that money flooding into the economy from the Federal Reserve would stoke inflation, Ms. Yellen said not to worry in a speech to Idaho bankers: High unemployment and the weak economy would tamp wages and prices.
Others at the Fed spoke forcefully in the other direction. Unless the central bank reversed the easy money course, Philadelphia Fed President Charles Plosser warned in December 2009, "the inflation rate is likely to rise to levels that most would consider unacceptable."
Ms. Yellen was proved right.
Predicting the direction of the U.S. economy with precision is impossible. But the Fed must forecast growth, inflation and unemployment to guide its decisions on interest rates. Central bank miscalculations—when the Fed pushed interest rates too low or too high—have historically turned problems into catastrophes, fueling the Great Depression, for example, and the wealth-eroding inflation of the 1970s.
The Wall Street Journal examined more than 700 predictions made between 2009 and 2012 in speeches and congressional testimony by 14 Fed policy makers—and scored the predictions on growth, jobs and inflation.
The most accurate forecasts overall came from Ms. Yellen, now the Fed's vice chair. She was joined in the high scores by other Fed "doves," policy makers who wanted aggressively easy money policies to confront a weak U.S. economy and low inflation. Collectively, they supported Fed Chairmen Ben Bernanke's strategy to pump money into the U.S. economy.
The least accurate forecasts came from central bank "hawks," those who feared Fed policies would trigger rising inflation.
Examining such predictions is more than a parlor game. Fed forecasts are important now because the central bank is near a turning point that will have a substantial impact on the U.S. economy.
Fed officials are considering whether to scale back an $85-billion-a-month bond-buying program this year, a move that could pull stock prices down and send interest rates higher.
If the Fed believes growth and hiring will pick up—and inflation will rise to a more normal 2%—the central bank will start to pull back on the purchases.
But if forecasts are wrong—if the Fed overestimates the economy's strength and pulls back too soon, for example—then economic growth could falter, stalling an incipient housing recovery and fueling the jobless rate.
"We should be keeping track of these forecasts and having some accountability," said Mark Gertler, a New York University economist who reviewed the Journal analysis.
Of course, forecasting ability doesn't always translate into wise central bank leadership. Arthur Burns, who led the Fed during the high inflation of the 1970s, was known for his forecasting prowess.
But New York Fed President William Dudley said forecasting errors have had serious consequences. "We were consistently too optimistic about growth over the 2009-2012 period," he said in a May speech. "As a result, with the benefit of hindsight, we did not provide enough stimulus."
Richard Fisher, the Dallas Fed president and another high scorer, took a different view. He has said slow growth was evidence the Fed's easy money medicine wasn't working and the economy needed less of it.
The Fed issues a quarterly forecast based on the views of its 12 regional Fed bank presidents and seven Fed governors. Over the past four years, these forecasts included errors, mostly from overestimating the economy's strength. None of the Fed forecast reports indicate who said what.
To evaluate the performance of individual Fed officials, the Journal looked at texts of speeches and congressional testimony. Forward-looking comments about the economy were rated for accuracy.
The Journal gave a mark ranging from -1.0—far off the mark—to 1.0—nearly perfectly correct—for each comment and averaged the total. A final score of zero showed someone was wrong as often as correct.
The analysis was shared with the Fed policy makers. Five of the 19 policy makers weren't ranked because they hadn't been at the Fed long enough or hadn't spoken publicly enough about the economy.
Ms. Yellen and Mr. Dudley—both in Mr. Bernanke's inner circle—ranked first and second in the Journal analysis. Both predicted slow growth and low inflation over the past four years. Ms. Yellen had the highest overall score in the Journal's ranking, 0.52. Mr. Dudley scored 0.45.
The lowest scores were tallied by Mr. Plosser, -0.01; St. Louis Fed President James Bullard, 0.00; Richmond Fed President Jeffrey Lacker, 0.05, and Minneapolis Fed President Narayana Kocherlakota, 0.07.
Investors who closely follow every comment by Fed officials don't appear to distinguish policy makers by the accuracy of their economic forecasts.
Macroeconomic Advisers LLC, a research firm, determined Mr. Plosser, Mr. Bullard and Mr. Lacker consistently moved markets more than Ms. Yellen. Messrs. Plosser, Lacker and Bullard and Ms. Yellen declined to comment for this article.
Forecasts by Fed officials depend on their view of how the economy works. Ms. Yellen, for instance, places great weight on the role of economic slack—high unemployment or idle factories—in driving inflation. Lots of slack, she has argued, holds down inflation. On the other hand, prices are more likely to rise when there are few available workers and factories are operating near capacity in this view.
"With slack likely to persist for years, it seems likely that core inflation will move even lower," Ms. Yellen said in September 2009. Her views warrant scrutiny because she is a candidate to succeed Mr. Bernanke when his term ends in January.
Mr. Dudley did especially well forecasting growth. Some Fed officials believed the current recovery would behave like past recoveries and the economy would, for a while, grow faster than its long-term trend of 3.2%.
But in May 2010, Mr. Dudley returned to his alma mater, New College of Florida, with a grim counter argument during a commencement address.
"The recovery is not likely to be as robust as we would like for several reasons," he said, pointing to the fragile banking system and the debt weighing down many households. He declined to comment for this article.
Other Fed officials, including Mr. Bernanke consistently predicted that faster growth was just around the corner.
"Although the pace of recovery has slowed in recent months and is likely to continue to be fairly modest in the near term, the preconditions for a pickup in growth next year remain in place," Mr. Bernanke said in October 2010, just before launching a bond-buying program. Growth slowed the following year.
Mr. Bernanke finished in the middle of the pack in the Journal's analysis, in part because he often relayed the consensus of Fed officials. He declined to comment for this article.
Luck also played a role in forecasts. In 2011, for instance, the economy looked like it was moving to faster growth when a tsunami struck Japan, disrupting the global economy.
The Fed's hawks had some of the worst forecasters. Mr. Plosser overestimated growth, while Mr. Bullard, Mr. Lacker and Mr. Kocherlakota warned of looming inflation. Their forecasts were wrong almost as often as they were correct.
While Ms. Yellen focused on the impact of slack on inflation, some hawks focused on money. The late Milton Friedman, the Nobel Prize-winning University of Chicago economist, said inflation was always and everywhere a byproduct of monetary policy: Prices only shoot higher when a central bank pumps too much money into the economy.
Hawks worried the Fed's decision to pump trillions of dollars into the U.S. financial system after the crisis would result in fast-rising prices. They sometimes couched their worries as risks, rather than predictions. In 2009, for instance, Mr. Bullard warned that the Fed's bond-buying programs had created a "medium-term inflation risk."
"The hawks have been issuing warnings, but there has been no sign of the things they've been warning against," said Martin Eichenbaum, an economist at Northwestern University and a Fed dove.
Mr. Kocherlakota of the Minneapolis Fed changed his hawkish views in 2012. "Inflation is not coming in as hot as I expected," he said in an interview last year. "You have to learn from the data." He declined to comment for this article.
Mr. Bullard changed his focus at times. In 2010, and again more recently, he signaled concern about inflation getting too low. A St. Louis Fed spokeswoman said the Journal analysis failed to account for the role Mr. Bullard's warnings played in formulating policies that helped to prevent inflation from getting too high or too low.
Some of the Fed's best forecasts came from noneconomists, including Fed governor Elizabeth Duke and Atlanta Fed President Dennis Lockhart—former bankers—and Mr. Fisher, a former investment manager. Some of the Fed's most brilliant Ph.D.s, including Mr. Kocherlakota, generated the most subpar scores.
Economists generally rely on economic models based on past behavior. These models are used heavily by the staff at the Federal Reserve Board in Washington and at regional Fed banks. But the recession and the current recovery were unlike most past cycles.
"The models have been wrong," Mr. Bullard, one of the Fed's many Ph.D. economists, said in an interview with the Journal in November.
James Hamilton, an economist at the University of California at San Diego who also reviewed the Journal's analysis, warned against betting that the doves' recent winning streak would continue.
"This was a period of subpar GDP growth and low inflation," he said. "Whether these same individuals would also prove to be better forecasters during a period of strong GDP growth and rising inflation is difficult to determine on the basis of the last four years."
One reason the hawks have been wrong about inflation is that the money the Fed has pumped into the financial system has tended to sit at banks without being lent to customers.
Economists say it is possible inflation can still catch fire if banks lend more aggressively and money starts circulating more widely.
If that happens, Mr. Eichenbaum said, the hawks would be proven right and "everybody else is going to look real bad."
Michael R. Crittenden contributed to this article.
July 29, 2013
May 11, 2013
Timing of Wind-Down Is Uncertain, but Focus Is on Managing Unpredictable Market Expectations
By John Hilsenrath
Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations.
Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated.
The Fed's strategy for how and when to wind down the program is of intense interest in financial markets. While the strategy being debated leaves the Fed plenty of flexibility, it might not be the clear and steady path markets expect based on past experience.
Officials are focusing on clarifying the strategy so markets don't overreact about their next moves. For example, officials want to avoid creating expectations that their retreat will be a steady, uniform process like their approach from 2003 to 2006, when they raised short-term interest rates in a series of quarter-percentage-point increments over 17 straight policy meetings.
"I don't want to go from wild turkey to cold turkey," Richard Fisher, president of the Federal Reserve Bank of Dallas, said in an interview Friday. "I think we ought to dial it back." Mr. Fisher is part of a contingent of Fed hawks who are wary of the central bank's easy-money policies.
Stocks and bond markets have taken off since the Fed announced in September that it would ramp up the bond-buying program, and major indexes closed at another record Friday. An abrupt or surprising end to it could send stocks and bonds in the other direction, but a delayed end could allow markets to overheat. And some officials feel they've ended other programs too soon and don't want to repeat the mistake.
The Fed's strategy on how to unwind the program has emerged as a source of some uncertainty in markets in the wake of its policy meeting earlier this month. The Fed said in its postmeeting statement that it was "prepared to increase or reduce the pace of its purchases" as the economic outlook evolved.
The suggestion that the Fed might boost its bond buying was a change in the policy statement that seemed to some an acknowledgment that more aid for the economy might be needed. Employment data in April were weak and inflation has fallen well below the Fed's 2% inflation objective, both points that allow leeway for more stimulus.
But many officials believe the recovery is on track and aren't yet concerned about the inflation slowdown. Instead, the most recent statement seems more aimed at signaling the Fed's broader flexibility in managing the programs.
Charles Plosser, president of the Philadelphia Fed, said in an interview Friday that the change in the statement was meant "to remind everybody" that the Fed has "a dial that can move either way."
The dial can also pause. Fed officials could shrink the size of their purchases and hold it at that level for a while as they assess the effects, or they could make several moves in a row if that seemed right. They could also boost their buying if they lose confidence about the economic outlook. The strategy is meant in part to ensure flexibility in an uncertain economy.
Yet while officials appear increasingly settled on a strategy for how to dial back the program, they haven't decided when to start.
Mr. Fisher said he advocated starting right away at the last Fed meeting. Some officials can envision taking a first step this summer, if strong data show the economy is weathering the tax increases and federal spending cuts that appear to be weighing on growth. But they might wait longer, especially if the economy disappoints, as it has for several years during the spring and summer months.
A Wall Street Journal survey of private economists this week showed that 55% expect the Fed to start shrinking its bond purchases in the third or fourth quarter this year, while 45% expect the Fed to wait until next year or later. None expected the Fed to increase its purchases as its next step.
The bond-buying programs are aimed at pushing down long-term interest rates and boosting financial markets to encourage more borrowing, spending and hiring in the broader economy. The Fed's securities holdings have increased from $2.58 trillion to $3.04 trillion since September.
Clearer signals about the Fed's plans could emerge next week. Five regional Fed bank presidents, including Mr. Fisher and Mr. Plosser, and Fed governor Sarah Bloom Raskin are scheduled to speak. Fed Chairman Ben Bernanke will discuss economic prospects for the long-run in a commencement address at Bard College at Simon's Rock next Saturday.
Central bank officials want to see substantial improvements in the job-market outlook before the programs are ended all together. And then, efforts to boost short-term interest rates might not occur for months or even years later.
The unemployment rate has fallen to 7.5% from 8.1% since August, both because of hiring and people leaving the workforce. Payroll employment has increased on average by 193,000 per month during the eight months since the program was launched, compared with average gains of 157,000 before it began. "It is pretty hard to say we haven't seen an improvement in the labor market," Mr. Plosser said.
Many economists believe economic growth will slow in the second quarter—in part because of fiscal drags—from a 2.5% annualized rate in the first quarter, but then accelerate in the second half. If growth remains firm in the weeks ahead that could give officials more confidence about starting to pull back.
Fed officials aren't very concerned about the annual rate of inflation falling toward 1% in recent months, well below their 2% objective. Because expectations of future inflation have remained steady, many Fed officials expect inflation readings to move back up toward 2% in the second half of the year. "I'm not too worried about it," Mr. Plosser said. "Expectations remain pretty stable."
The Fed has policy meetings in June, July and September, and Mr. Bernanke will have a chance to explain its actions at news conferences in June and September.
Some of the bond-buying program's most vocal proponents have signaled more optimism about the outlook and a willingness to consider pulling back from the programs. John Williams, president of the Federal Reserve Bank of San Francisco, said in an interview last month that he anticipated pulling back this summer.
"I'm looking for continuing signs of improvement in the economy," he said, "sustained, ongoing improvement in the economy."
Corrections & Amplifications
Federal Reserve Chairman Ben Bernanke will discuss economic prospects for the long-run in a commencement address at Bard College at Simon's Rock in Massachusetts next Saturday. An earlier version of this article incorrectly said the address would be at Bard College of New York.
May 13, 2013
By John Hilsenrath
The next chief of the Federal Reserve will decide when to reverse the easy-money policies of Ben Bernanke, a judgment that could strangle the economic recovery if made too early or trigger runaway inflation if made too late.
The task could fall to Fed vice-chairwoman Janet Yellen, a meticulous and demanding Yale-trained economist, who issued prescient, early warnings about the housing bust. After the financial crisis, she helped focus the Fed on jobless Americans, with policies aimed at stimulating the economy at least until unemployment falls to 6.5%.
Ms. Yellen is a top contender for the job, assuming Mr. Bernanke steps down when his term ends in January, but her selection is far from certain. She faces a big question among investors: Is she wary enough about the risks of easy money to close the Fed's credit spigot before financial bubbles emerge or consumer prices rise too far? As a first step, Fed officials have mapped out a strategy that maintains flexibility for winding down its $85 billion-a-month bond-buying program intended to spur the economy. But the timing of the withdrawal is still being debated.
"I am worried that the approach that she and many others favor does over time allow the Fed's anti-inflation credibility to erode," said Alfred Broaddus, former president of the Federal Reserve Bank of Richmond.
Born in Brooklyn to parents who lived through the Great Depression, Ms. Yellen, age 66, has called for the Fed to respond aggressively to high unemployment. She argued after the financial crisis that inflation wasn't likely to emerge with the economy in such a debilitated state—a correct view, so far. Inflation has since averaged 1.8% a year.
"These are not just statistics to me," she said in a speech to the AFL-CIO labor union group in February. "We know that long-term unemployment is devastating to workers and their families."
Richard Trumka, the union president who invited her to speak, said the U.S. would be "well-served" if Ms. Yellen succeeded Mr. Bernanke. "She understands the plight of Wall Street and workers, not just Wall Street," he said.
But she has met resistance among others inside and outside the Fed. James Bullard, the president of the St. Louis Fed, said in an interview that if the central bank tried too hard to bring down unemployment, it might uncork inflation without doing much to foster jobs.
"A lot of people are talking about putting more weight on unemployment," he said, without citing Ms. Yellen directly. "I don't think it's a good idea."
Whoever is nominated by President Barack Obama for the post is likely to face close scrutiny in Senate confirmation hearings.
Sen. Richard C. Shelby of Alabama, a top Republican on the Senate Banking Committee, voted against her confirmation as vice chairwoman in 2010, accusing her of "inflationary bias."
Among private economists surveyed last week by The Wall Street Journal, 29 of 38 said they expected Ms. Yellen to get the job. Other candidates could include former Fed vice chairman Roger Ferguson and former Treasury secretaries Timothy Geithner and Lawrence Summers.
"If I were in the White House I would relish the idea of nominating the first female Fed chairwoman, with a résumé that is potentially better than the current Fed chairman," said Vincent Reinhart, Morgan Stanley chief U.S. economist and former head of the Fed's monetary affairs division.
Still, he said, "I think market participants are nervous about her," pointing to the concern that she would weight employment over inflation. "Look at the AFL-CIO speech."
Ms. Yellen impressed Mr. Obama when he sought her advice as a presidential candidate, but they aren't close, according to people who know them. When she was nominated for Fed vice chairwoman, for example, she didn't have a face-to-face interview with Mr. Obama, according to people familiar with the matter.
Mr. Geithner and Mr. Summers, by contrast, have strong White House ties. Mr. Geithner has said he doesn't want the job; Mr. Summers is interested, according to people who know him, but he declined to comment.
While Mr. Bernanke doesn't appear to want a third term as Fed chairman, the president could press him to stay. Mr. Bernanke said in March he had discussed his plans "a bit" with Mr. Obama but declined to say more. The White House hasn't disclosed how the president will choose.
The selection involves more than political drama. The Fed could be entering another perilous period. The central bank has pushed short-term interest rates to near zero, launched bond-buying programs that pumped trillions of dollars into the economy and left its own $3 trillion securities portfolio swollen with mortgage-backed and Treasury securities.
At some point, the next Fed leader will need to use untested methods to reverse the process, raising interest rates and siphoning up huge volumes of cash from banks. "They will be learning as they go," said Laurence Meyer, a former Fed governor.
Ms. Yellen's supporters say there are few better prepared students. She was class valedictorian at Fort Hamilton High School in a middle-class Brooklyn neighborhood. Her father was a doctor who worked out of the basement of the family's brownstone. Her mother, who quit an elementary school teaching job to raise two children, drove him to house calls and managed the family's finances—tucking away savings and tracking stock prices from the afternoon newspaper in small, neat handwriting, said Ms. Yellen's brother, John.
"My parents held us to high academic standards," said John Yellen, the archaeology program director at the National Science Foundation. After dinner, he recalled, they listened to radio programs, including the adventure series, "Sergeant Preston of the Yukon."
Ms. Yellen got interested in economics in college. While an undergraduate at Brown University, she was impressed with a talk by visiting Yale professor, James Tobin, who would later win a Nobel Prize in economics. She decided to pursue an economics Ph.D. at Yale, where her interest in unemployment grew while working with Mr. Tobin, her mentor and dissertation adviser.
Mr. Tobin, a child of the Depression and an adviser to presidents John F. Kennedy and Lyndon B. Johnson, emphasized the human toll of high unemployment and the government's obligation to combat it. He was so impressed with her meticulous notes of his lectures that he asked her to turn them into a textbook. She left to teach at Harvard and didn't complete the book.
Willem Buiter, Citigroup's chief economist, said Ms. Yellen's notes were like the Old and New Testament for Yale Ph.D. students when he studied there in the 1970s. "She was a legend when I arrived at graduate school," said Richard Levin, Yale's president, who used them to study in the 1970s.
Ms. Yellen went to work on the Fed staff in the fall of 1977, where she met her future husband, economist George Akerlof. They married the following June. "Not only did our personalities mesh perfectly, but we have also always been in all but perfect agreement about macroeconomics," he wrote in an autobiography after he won the 2001 Nobel Prize for economics. Their son, Robert Akerlof, is an economist teaching at the U.K.'s University of Warwick.
Her husband is skeptical of markets. In a talk at last year at Warwick, he said, "the public and economists have too great an acceptance that whatever markets do is right."
Ms. Yellen climbed the Fed ranks by being methodical rather than iconoclastic. She shows up at policy meetings with carefully crafted statements. Those who work with her say she arrives at the airport hours early.
During the mid-1990s, then-Fed chairman Alan Greenspan asked her to take the lead in an internal Fed debate about whether to adopt a formal inflation target. Her preparation impressed others. "She does her homework," said Mr. Broaddus, her chief adversary in the debate.
During the discussion Ms. Yellen challenged Mr. Greenspan, who was rarely confronted, to define his views of price stability, according to Fed transcripts and people there. Later, as the economy strengthened, she worried about the booming stock market and also urged Mr. Greenspan to raise short-term interest rates to head off inflation—advice he declined, according to Mr. Meyer, her colleague at the time.
Ms. Yellen became chairwoman of the Council of Economic Advisers under President Bill Clinton in 1997, a period of strong economic growth. She and Clinton adviser Gene Sperling danced with their hands in the air at a 1999 White House staff meeting in the Roosevelt Room when the jobless rate fell near 4%, according to people at the meeting.
Later, as president of the San Francisco Fed, Ms. Yellen sounded early warnings about the danger of a U.S. housing bust. "I still feel the presence of a 600-pound gorilla in the room, and that is the housing sector," she said at a June 2007 policy meeting, according to Fed transcripts. "The risk for further significant deterioration in the housing market, with house prices falling and mortgage delinquencies rising further, causes me appreciable angst."
Three months later, she foresaw a dangerous economic cascade.
"A big worry is that a significant drop in house prices might occur in the context of job losses, and this could lead to a vicious spiral of foreclosures, further weakness in housing markets, and further reductions in consumer spending," she said, at a September 2007 meeting. "The potential effects of the developing credit crunch could be substantial."
In December, she called on the Fed to cut interest rates aggressively, according to Fed transcripts. Mr. Bernanke chose a more cautious approach—until a month later, when conditions worsened.
Shortly after the Fed rescued Bear Stearns Cos. in March 2008, Mr. Obama—then a senator and presidential candidate—called Ms. Yellen. He wanted explanations of the unfolding financial turmoil and she was among a few people he asked, said Austan Goolsbee, an Obama adviser who arranged the call.
Ms. Yellen, a Democrat, impressed Mr. Obama during a 30-minute conversation as she explained the risk of modern-day bank runs at Wall Street firms spreading like wildfire through markets, Mr. Goolsbee said.
She has ruffled feathers at the Fed with her strong views, but the central bank in the past three years has moved toward her prescription of sustained aggressive action.
As Fed officials deliberated last April about how long to keep interest rates low, Ms. Yellen delivered a 20-page speech, with 18 footnotes and 15 charts, making the argument that rates should stay low until 2015 or later. The speech, later praised by Mr. Bernanke, presaged a shift by the Fed toward making clear its intentions to keep rates down longer than previously planned.
"She argues very effectively," Charles Evans, president of the Chicago Fed said in an interview. "She is constantly asking you to think about the argument that you have put on the table, especially when it is at variance with other facts. People look to her and listen to what she's saying."
While the Fed's second-in-command traditionally stands in the shadow of the chairman, Ms. Yellen has been outspoken. Mr. Bernanke was closer personally to Ms. Yellen's predecessor, Donald Kohn, another potential successor, who formed a bond with the chairman during the crisis, said people who know them.
Still, Mr. Bernanke and Ms. Yellen largely see eye-to-eye. "I can't see a material difference between them," said another central banker who has seen them often at international meetings in Basel, Switzerland.
Last year, Ms. Yellen ran a Fed committee that crafted a document detailing how the Fed viewed its so-called dual mandate, the central bank's focus on both inflation and unemployment, as set by Congress.
The document for the first time made a formal 2% inflation target, a goal of both Mr. Bernanke, as well as inflation hawks—those who worry most about keeping prices stable. It also laid out markers for unemployment rates, which the hawks resisted.
Officials haggled over the 531-word document for months, according to people involved in the discussions. The Fed directly controls inflation through its management of the money supply, but many factors influence unemployment. Officials were wary of promising too much on hiring, and they struggled to define how they would balance job goals with inflation.
The document illustrated Ms. Yellen's view of Fed operations. As long as inflation was running below 2%, she argued, the Fed could afford to keep money flowing, helping bring down unemployment.
Ms. Yellen also pushed for more than a year behind the scenes for another step to signal the Fed's commitment to low rates, said people involved in the debate. In December, following the advice of her and Mr. Evans, the central bank promised to keep short-term interest rates near zero until the jobless rate falls to 6.5%, as long as inflation doesn't threaten to rise any more than a half-percentage point above the 2% goal.
The moves create a framework for an exit plan: As the job market improves, the central bank will gradually stop its bond buying. Later, after unemployment falls to 6.5% or lower, the Fed will start raising short-term interest rates.
If inflation ticks up, it might move sooner. Eventually, the Fed could sell some of its bonds and begin soaking up all that cash.
It will be up to the Fed's next leader to prove the plan will work.
June 21, 2013
By Jon Hilsenrath
The markets might be misreading the Federal Reserve’s messages.
In the two days since Fed Chairman Ben Bernanke said the central bank expects to curb its big bond-buying program later this year, stocks tumbled, long-term interest rates rose and interest-rate futures contracts fell, meaning investors bet the Fed would raise short-term interest rates sooner than previously expected.
“The FOMC was more hawkish than we had expected,” economists at Goldman Sachs concluded after the Wednesday Fed policy meeting, a view widely held on Wall Street trading floors.
However, a close look at Mr. Bernanke’s press conference comments and Fed official’s interest-rate projections released after the meeting show the Fed took several steps aimed at sending the opposite signal.
–Mr. Bernanke emphasized that even though the Fed might pull back on bond-buying later this year — which is akin to easing your foot off the gas pedal of a car — it would be a long time before it took the more aggressive step of raising short-term interest rates — which is akin to pressing the brake. He also emphasized in his prepared statement that when rate increases come, they “are likely to be gradual,” a hint of future caution about rate increases he hasn’t given before.
–Mr. Bernanke suggested the Fed could keep short-term interest rates near zero even longer than previously planned. Since December, the Fed has said it would keep short-term rates near zero at least as long as the jobless rate is above 6.5%. In his prepared statement, Mr. Bernanke emphasized that rates could stay low for a while even after unemployment falls below 6.5%, particularly if inflation stays low. “The more subdued the outlook for inflation,” he said, “the more patient the [Fed] would likely be,” he said. In the question-and-answer session he went even further and said for the first time that the Fed might even lower that 6.5% threshold.
–Fifteen Fed officials expect the central bank won’t need to raise short-term interest rates until 2015 or 2016 and just four said it would need to do so before then. That was a slight move away from early tightening: Previously five anticipated tightening before 2015. The average short-term benchmark rate expected at the end of 2015 among Fed officials didn’t change much – it was 1.34%, compared to 1.30% in March. The median expected rate – meaning half saw one higher and half saw one lower – remained unchanged at 1%.
–Mr. Bernanke said “a strong majority” of Fed officials had concluded the Fed won’t ever sell its growing portfolio of mortgage-backed securities, and instead will let it shrink as mortgages are paid off. In the past the Fed had said it might someday sell these bonds, a threat to any investor who held the bonds. He was more emphatic than ever Wednesday about not selling.
–A hawk became a very vocal dove. St. Louis Fed president James Bullard dissented from the Fed’s policy statement, saying he thought the central bank should be leaning toward even easier money policies. In the past, Mr. Bullard has tended to side with Fed “hawks” opposed to easy money policies. In a statement his office released Friday morning, he argued that the Fed’s decision to lay out a plan for pulling back easy money was “inappropriately timed” because inflation and economic output have been soft.
–Mr. Bernanke emphasized the conditional nature of the Fed’s plan to withdraw bond-buying. “If you draw the conclusion that I’ve said that our policies, that our purchases, will end in the middle of next year, you’ve drawn the wrong conclusion, because our purchases are tied to what happens in the economy … we have no deterministic or fixed plan.”
Despite the Fed’s efforts to signal it wouldn’t apply the brakes any time soon, the market reacted sharply. Investors appear to have been caught off guard by the specific timetable Mr. Bernanke laid out and the central bank’s optimism about the 2014 growth outlook.
“People have come to expect that the Fed is going to err on the side of being more growth friendly,” said Michael Feroli, a J.P. Morgan economist. Investors wanted to hear “that he would see the job through and not take the punch bowl away until [the economy is] really getting going.”
In Eurodollar futures markets, expected three-month borrowing rates in December 2014 jumped from 0.55% to 0.76%. The expected federal funds rate in December 2014 rose from 0.28% to 0.385%. These movements imply investors see increasing odds of Fed rate increases by the end of 2014.
On Friday markets started to settle, with stocks opening moderately higher.
The market reaction underscores the challenge the Fed has created for itself by launching the bond-buying program and other unconventional efforts to boost economic growth. At some point it will have to exit from those programs and communicate clearly about how and when that will happen. Officials hope to accomplish both tasks without creating the kind of market turmoil that could set back the recovery they’ve tried to energize. This week’s events show how hard that will be.
The only statement from a Fed official since the meeting has come from Mr. Bullard .
Mr. Bullard was clearly worried about how the market would respond to the Fed’s decision to announce a timetable for winding down its bond buying. He “felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement,” according to his statement.
Given the market turmoil that has since ensued, other Fed officials might now be wondering if he was right.
June 22, 2013
By Jon Hilsenrath
The financial markets' violent movements this week underscore the immense challenge the Federal Reserve faces as it eyes an eventual end to its $85 billion-a-month bond-buying program.
After trying for years to lift a postcrisis economy with a concoction of untested easy-money programs, the Fed delivered a largely uplifting message Wednesday: The economy might be getting strong enough to stand on its own with less support.
The market reacted as an addict might to the threat of losing drugs—it broke into shakes and a cold sweat.
Treasurys tumbled, the yield on the 10-year note seeing its steepest weekly jump in a decade. Five- and seven-year bonds, the focus of much of the Fed's bond buying, saw even more violent selling. Investors in high-yield and municipal bonds also rushed for the exits.
The Standard & Poor's 500-stock index fell 2.1%. Emerging markets, where jitters over the Fed mixed with questions about the health of China's economy and financial system, were hit harder. The MSCI emerging markets index fell 4.7%, its biggest weekly drop since May 2012. Gold fell to a nearly three-year low before recovering slightly on Friday.
The market reaction presents the Fed with new questions that will only be answered in the months ahead: Are the economy and markets really healthy enough now to stand on their own? Might the prospect of withdrawing stimulus undermine the recovery the Fed has been struggling for years to engineer? Are its efforts to clarify its thinking helping or hurting?
The central bank was largely behind the market drama. Seeing a stronger economy in the months ahead, Chairman Ben Bernanke on Wednesday set out a tentative timetable for the Fed's pullback from its latest bond-buying program—launched last September to push down long-term interest rates, buoy asset prices and encourage economic growth. In a news conference after a two-day policy meeting, he said the Fed could start reducing its monthly bond purchases later this year and end them altogether by mid-2014, but only if the economy picks up as the Fed expects.
Mr. Bernanke sought to clarify the Fed's intentions after commentary by a stream of Fed officials in recent weeks had led to market uncertainty about the central bank's plans. But at least one Fed official thought the Fed's signal about ending the bond buying program came too early.
James Bullard, president of the Federal Reserve Bank of St. Louis, said in a statement early Friday that Fed officials were outlining a plan for scaling back bond buying before they had enough evidence the economy would improve as they forecast.
"A more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement," Mr. Bullard said. He dissented from the Fed's policy statement Wednesday, in part because he objected to laying out a timetable for reduced bond buying.
One problem the Fed now faces is that in signaling its plans for the so-called quantitative-easing program, Mr. Bernanke might have led investors to believe the central bank is going to rein in all of its easy-money policies sooner or more aggressively than it actually expects.
The Fed isn't just buying bonds; it also has long held short-term interest rates close to zero, and has said since December it will keep its benchmark federal-funds rate there until the jobless rate falls to at least 6.5%. Mr. Bernanke likens the two levers to driving a car: When it reduces its bond purchases, that will be like lightening the pressure on the accelerator; when it starts raising rates, it will be akin to tapping the brake.
Many investors appear to have missed Mr. Bernanke's signals that the Fed might wait longer than expected before raising short-term rates. He said on Wednesday that the 6.5% unemployment rate threshold might be too high and that the Fed might decide to keep rates low for long after the rate drops below that level, especially if inflation remains low.
Other Fed officials seem to be on board with him. According to projections released after the meeting, only four Fed officials saw short-term interest rates rising before 2015, while 15 saw rates remaining near zero until 2015 or 2016.
In theory, that should reassure investors that borrowing costs are going to stay relatively low for years. But futures markets indicated investors now think the Fed is going to move rates up sooner, not later.
The expected federal-funds rate for December 2014 rose, in futures-market trading, to 0.41% from 0.28%, showing that investors see increasing odds of Fed rate increases by the end of 2014.
"People have come to expect that the Fed is going to err on the side of being more growth friendly," said Michael Feroli, a J.P. Morgan economist. Investors wanted to hear that Mr. Bernanke "would see the job through and not take the punch bowl away until things are really getting going."
Some analysts said many of the market movements of the past week were to be expected.
Henson Orser, the head of bond and stock sales at Nomura Securities, noted in an interview that interest rates have been extraordinarily low for some time. Long-term interest rates adjusted for inflation are near zero and until recently were negative, but in normal times, long-term rates should be two to three percentage points above the inflation rate. It was inevitable, and a sign of a healthy economy, he said, that these rates have started to rise.
"We should not be surprised by what's happening," Mr. Orser said. "Bernanke went out of his way to emphasize that ultimately interest rates have to go up, which is a good thing because we have a stronger economy."
Though stock prices have fallen, he noted, they are still close to their historic highs.
Long-term interest rates kept climbing Friday. Yields on 10-year Treasurys hit 2.514%, a rise of 0.388 percentage point for the week, as investors continued trying to adjust to a shifting monetary landscape.
But stocks improved a bit. The Dow Jones Industrial Average rose 41.08 points, or 0.28%, to 14799.40, after losing 353.87 points on Thursday and more than 200 on Wednesday. For the year, the Dow is still up 12.94%, but it has fallen nearly 3% in just two weeks.
Matt Jarzemsky contributed to this article.
September 23, 2013
By Jon Hilsenrath
Janet Yellen, the lead candidate to succeed Federal Reserve Chairman Ben Bernanke, brings a demanding and harder-driving leadership style to the central bank, in contrast to Mr. Bernanke's low-key and often understated approach.
Ms. Yellen, the Fed vice chairwoman, is highly regarded by many central bank staff members, who call her an effective leader with a sharp mind. But she has clashed with others and left some hard feelings in the wake of those confrontations, according to interviews with more than a dozen current and former staff members and officials who worked with her directly in recent years.
Most agree that Ms. Yellen—who has climbed the ranks from Fed researcher to Fed governor and regional Fed bank president, in between stints outside the central bank—is exacting and exceptionally detail-oriented.
At Fed policy meetings, Ms. Yellen is courteous, respectful, serious and meticulously prepared, according to officials who have attended meetings with her. She has staked out strong positions in favor of the Fed's easy-money policies that sometimes put her at odds with opponents of the policies, these people said.
When Lawrence Summers, the former U.S. Treasury secretary, was seen as the favorite to succeed Mr. Bernanke next year, his sometimes-combative style received substantial attention. Ms. Yellen often was described as milder-mannered and better at building consensus.
Mr. Summers announced a week ago he was pulling out of consideration for the Fed chairmanship, citing a potentially acrimonious confirmation vote in the Senate.
Now that administration officials term Ms. Yellen the front-runner, her leadership and management style are drawing more scrutiny. President Barack Obama is expected to announce his nominee in coming weeks.
People differ over Ms. Yellen's style and its effectiveness. Many senior Fed officials, including those who have opposed her on tough policy questions, say the 67-year-old Brooklyn, N.Y., native would be easy to work with if picked to lead the institution.
"She listens to all sides of a debate," said Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, who wants the Fed to end its $85 billion-a-month bond-buying program, which Ms. Yellen has strongly supported.
Some others who have worked with her behind the scenes disagree.
Dick Anderson, who served a brief stint as the chief operating officer of the Fed's Washington board, ending in December 2012, said, "Yellen's abrasive, intimidating style is probably more suited for a 'Mad Men' era as opposed to a modern office environment."
Mr. Anderson and Ms. Yellen clashed over a plan he proposed to cut spending by regional Fed banks, which she thought reached beyond his job description and resisted, according to people familiar with the matter.
Her style, Mr. Anderson said, sharply contrasted with Mr. Bernanke's style and wouldn't serve the Fed well.
A Fed spokesperson declined to comment on the matter.
A harder-driving style by the Fed chief, if Ms. Yellen adopts one, could push the central bank toward more decisive action, but also could make an already fractious institution even more so.
The process for making interest-rate decisions has been unruly at times for Mr. Bernanke. The 12 regional Fed bank presidents are vocal and often have sharply divergent views; his six fellow Fed board governors are quieter publicly, but their strong private views can have a big influence on decisions. He has worked patiently behind the scenes at times to forge policy compromises.
Ms. Yellen has pushed the Fed to use low-interest-rate policies to spur faster economic growth and bring down unemployment, but some other officials doubt the policies work and worry they will have negative unintended consequences such as higher inflation. That disagreement hangs over current decisions about whether to start pulling back the bond-buying program.
If she becomes the Fed's leader, Ms. Yellen would be challenged to balance the demands of maintaining the institution's collegiality against her own drive to move the place toward her sometimes strongly held beliefs, including her support for easy-money programs.
In the process, both insiders and outsiders would be watching to see if she attempts to impose more discipline on the 18 other policy makers, some of whom publicly air their divergent views.
"Speaking with fewer voices is quite desirable," said Alan Blinder, a Princeton University professor and former Fed vice chairman. "The question is, can anyone accomplish it? I'm not sure anyone can at this point. But Janet Yellen, who has watched the [Fed] from every vantage point, probably has the best shot at it."
Every Fed leader brings to the job a different style. Alan Greenspan's quiet authority was rarely challenged during his 18-year rule. His predecessor, Paul Volcker, clashed with governors appointed by President Ronald Reagan.
Ms. Yellen has had tense relations at times with Fed Governor Daniel Tarullo, the Fed's point person on bank regulatory issues, according to people who know them. But Ms. Yellen seemed to signal they were on common ground in a speech in San Diego earlier this year when she endorsed his views on regulation.
Ms. Yellen and Mr. Tarullo don't have disagreements on any substantive issues, said a person familiar with their relationship.
"She is very much a consensus builder," said San Francisco Fed President John Williams, a Yellen fan who served as the San Francisco Fed bank's head of research when she was bank president, speaking in an interview in April.
As evidence, Mr. Williams pointed to an important but little-noticed "statement of objectives" that Ms. Yellen helped the Fed craft nearly two years ago. It established a 2% inflation target and a framework for the central bank to think about attaining its other goal of low unemployment.
The statement, which shapes many of the Fed's decisions, was hotly debated for months with many differing opinions, but a Fed committee Ms. Yellen ran completed it despite disagreements about what it should say.
Still, Ms. Yellen has been a polarizing figure among some Fed staff members in Washington, according to several current and former staff members. An armada of more than 300 Fed staff economists plays a central role in examining the banking system, analyzing the economy and formulating policies.
Ms. Yellen led reviews of the Fed's research divisions after becoming vice chairwoman. In the process, several people said, Ms. Yellen ruffled feathers in the Fed's important monetary-affairs group, which was exhausted and depleted by the financial crisis. This group does most of the ground work formulating the Fed's interest-rate decisions.
Yet some other Fed staff members described Ms. Yellen as an excellent collaborator, citing her intellect, organization and support for them and their work.
Victoria McGrane contributed to this article.
October 8, 2013
By Jon Hilsenrath
The Federal Reserve’s decision to continue one of the most audacious experiments in monetary history — an $85 billion-a-month bond-buying program designed to boost growth — followed six months of tense negotiations inside the central bank, and a stumbling effort to let the public know what was going on.
A small group of Fed officials has been privately pushing Fed Chairman Ben Bernanke to plan an exit from his signature program, said several people familiar with the closed-door deliberations. But glimmers of a weakening economy prompted the Fed in September to keep the program going — surprising markets primed by months of central-bank suggestions that a wind-down was nearing.
Privately, Fed Governor Jeremy Stein and two other governors, Jerome Powell and Elizabeth Duke, were a driving force behind efforts to limit the program’s growth, according to people involved in the deliberations. All three supported Bernanke’s efforts to charge up a weak economy but were uneasy about the program’s potential side effects and the growing size of the Fed’s holdings.
Stein, a Harvard finance professor, focused on the risk that the Fed might stoke a new credit bubble. Powell, a former Wall Street executive, talked at meetings about developing a “stopping rule” for the program to ensure the Fed’s portfolio of securities didn’t get too big. Duke, a former banker, was likewise wary of making an unlimited commitment.
By April more officials, including the governors, were getting worried about terms like “QE-ternity” and “QE-infinity” floating around financial markets, which suggested some investors thought the program was boundless, according to people familiar with Fed discussions. The Fed officials thought the job market had made enough progress to warrant discussing an exit.
Disagreements about how to communicate their plans boiled up at a May 1 policy meeting. Some officials wanted to indicate the program wouldn’t go on forever, and sought to insert a line in the Fed’s policy statement saying the Fed might “increase or reduce” the program, according to several people who attended.
It was meant to signal the program wasn’t on autopilot, but officials disagreed about how it might be interpreted, these people say. Some hoped the public would zero in on the new word “reduce” and see the Fed preparing for an exit. Others suspected the public would focus on the new word “increase” and infer the Fed might instead ramp up the program.
They agreed to include the line anyway. Many investors and analysts were confused.
October 10, 2013
By Jon Hilsenrath
Janet Yellen, if confirmed to lead the Federal Reserve, faces the difficult task of defining when the central bank will step back from the expansive monetary programs employed over the past six years to salve the crisis-racked economy.
President Barack Obama introduced Ms. Yellen, beaming at his side, as his choice to become chairwoman of the central bank when Ben Bernanke's term ends in January. Her nomination is subject to Senate confirmation.
"A lot of people aren't necessarily sure what the Federal Reserve does," Mr. Obama said. But thanks to the Fed under Mr. Bernanke, he added, "more families are able to afford their own home, more small businesses are able to get loans to expand and hire workers, more folks can pay their mortgages and their car loans."
The selection of the 67-year-old Ms. Yellen was historic on many levels. In one stroke, Ms. Yellen has a chance to become the first woman to run the Fed since its founding in 1913, the most powerful economic policy maker on the globe and one of the most influential women in U.S. history.
It also puts her in a position to place her stamp on one of the most inscrutable but influential institutions in the U.S. government. The Fed was established after a financial crisis in the early 20th century to provide emergency lending to banks during economic panics. Its role and powers have grown since, to regulating banks, stabilizing inflation and softening the blows of a volatile economy on the nation's workforce. According to a law passed in 1977, the Fed is assigned to achieve what is known as a "dual mandate" of maximum employment and stable prices.
Tested by the 2008 financial crisis, Mr. Bernanke pushed the Fed's boundaries in his efforts to stabilize an ailing economy. But the wisdom and effectiveness of his signature programs remain subjects of intense debate inside the Fed, on Wall Street trading floors, in the boardrooms of foreign central banks and in the halls of Congress. Most hotly debated is a bond-buying program often called quantitative easing, or QE, which has vastly expanded the Fed's holdings of securities.
Ms. Yellen now gets to put her own postscript on programs she helped to write. Her big decisions in the next four years will involve deciding when to pull back from these efforts.
In brief comments after Mr. Obama introduced her, she suggested that she is in no hurry to pull back now. "More needs to be done to strengthen the recovery," she said in a statement. "Too many Americans still can't find a job and worry how they'll pay their bills and provide for their family."
Whether the Fed can do much to help them is a central point of contention that she will need to manage with 18 other policy makers who take part in the Fed's decisions.
The Fed has a simple but extraordinarily powerful tool that it uses to guide the economy: It can print money and use that money to accumulate securities. Dollar bills have the Fed's name emblazoned across their top, and in the modern digital age the Fed can deposit billions in the blink of an eye into the accounts of banks, which then filter into the economy.
In normal times the Fed uses this power to manage the money supply to guide very short-term interest rates—rates that banks charge each other on overnight loans—and then lets the private sector do the rest of the work in driving credit to or away from businesses and households. Lowering the rate tends to encourage borrowing, which spurs near-term spending and investment; raising the rate tends to do the opposite. If it prints too much money, it can cheapen a dollar's value and cause inflation.
During the financial crisis, the Fed pushed short-term rates to near zero in an effort to encourage economic activity even as businesses, banks and households pulled back. With Ms. Yellen's strong support, the Fed has promised to keep rates low until the unemployment rate, now 7.3%, gets below 6.5%. The Fed went a step further, using its money-printing ability to buy trillions of dollars' worth of long-term Treasury and mortgage securities in an effort to push longer-term rates even lower.
Since 2006, the Fed's securities holdings have expanded from $750 billion to $3.5 trillion. Much of that increase has happened since the financial crisis ended in 2009, but some question whether it was worth the risk given the mixed results in the economy. The economy has been stuck at a meager growth rate around 2% through four years of recovery, though unemployment has fallen notably from 10% at its worst. Inflation, meantime, is running below the Fed's 2% goal, which Ms. Yellen had a role in establishing. Though the Fed has printed a great deal of money, risk-averse banks aren't lending much of it and debt-constrained consumers aren't borrowing much.
The first challenge on Ms. Yellen's agenda, if confirmed, will be steering debate within the Fed about whether to start pulling back the $85 billion-a-month bond-buying program that many officials want to wind down as the unemployment rate falls.
Fed officials decided at their September meeting against trimming the bond purchases. For many of the officials, that was a "relatively close call," according to minutes of the meeting released Wednesday.
Later, she will need to lead discussions about when to begin raising short-term interest rates.
Ms. Yellen suggested Wednesday that she brings to the job an expansive view of the Fed's responsibilities.
"We can help ensure that everyone has the opportunity to work hard and build a better life," she said Wednesday at the White House. "We can ensure that inflation remains in check and doesn't undermine the benefits of a growing economy. We can and must safeguard the financial system."
But some officials and private economists think the Fed needs to take a narrower view of what it can achieve with easy-money policies.
In a statement about their goals that Ms. Yellen helped to craft in 2012, Fed officials agreed that in the long run their policies dictate the level of inflation. Most agree they can shape growth and unemployment in the short run by nudging people's borrowing plans, but the Fed said in this statement that other factors determine the economy's long-run growth rate and job gains. These factors include influences such as productivity, population growth or regulatory policies.
"The limits of monetary policy are pretty clear," said Marvin Goodfriend, a professor at Carnegie Mellon University's Tepper School of Business. "Monetary policy essentially over the medium- to longer-term only affects inflation."
The Fed's own research suggests the bond-buying program has had modest benefits. But Ms. Yellen has argued the costs of running these programs are small. Inflation hasn't taken off, as many critics of the programs predicted would happen. The dollar has been steady compared with other currencies even as the Fed has printed trillions more, despite warnings its value would collapse. However, some officials became worried earlier this year that the Fed might be stirring new financial bubbles.
"There is just a limit to what the Fed can do," said Martin Feldstein, a Harvard University professor who has known Ms. Yellen since they were co-teachers in a class on macroeconomics at Harvard in the early 1970s.
He said the Fed needs to start pulling back its bond-buying programs. Mr. Feldstein argued that a better formula for reviving the economy would be a combination of long-run deficit cuts through overhauled government benefits programs combined with short-run fiscal stimulus. Those are policies the Fed doesn't control.
"I do not expect bold policy initiatives from a Yellen Fed in the near term," said Christina Romer, a friend of Ms. Yellen's and former head of Mr. Obama's Council of Economic Advisers. "She has been a key architect of the current policies and so I would expect a great deal of continuity."
However Ms. Romer says the critics of the Fed's easy-money policies have it wrong. The Fed should have pushed the boundaries of easy money even more aggressively to get the economy back onto its precrisis footing quicker, she said. A more aggressive Fed might have jolted the expectations of households and businesses toward better times ahead and encouraged more growth in the near term. "It would take more than an incremental change in Fed policy to really change expectations and do a lot to boost growth," she said.
March 18, 2013
By Jon Hilsenrath
The gazillion-dollar question in financial markets these days is this: When will the Federal Reserve turn to the exit ramp?
Investors, lenders and many other market participants obsess about the end of easy money and the broad implications it carries. When the Fed decides to pull back from its latest bond-buying program—$85 billion a month in Treasury and mortgage debt purchases—or when it starts raising short-term interest rates from near zero, stocks could tumble, borrowing costs jump and the economy slow.
In the run-up to the Fed's policy meeting Tuesday and Wednesday, Fed Chairman Ben Bernanke and other top officials have sought to signal that the unwinding isn't likely until the recovery is much further advanced.
A Wall Street Journal survey of 50 private economists, conducted March 8-12, shows the message is sinking in. Economists who follow the Fed, on average, expect more than another year of bond buying, more than two more years of rock-bottom short-term interest rates, and a Fed portfolio of securities holdings that will remain bloated more than a decade after the financial crisis started. "It is a new era for monetary policy," said Julia Coronado, the chief economist for BNP Paribas and a former Fed staff economist.
According to the economists surveyed, circle these dates on your calendar: November 2013, May 2014 and June 2015. That is when on average they expect the Fed, respectively, to:
1) start slowing its monthly bond purchases,
2) stop buying bonds, and
3) begin thinking seriously about raising short-term interest rates, as unemployment reaches 6.5%.
Related to this possible scenario is an important shift in how the Fed could operate in the future.
In the PFC era—for "Pre-Financial Crisis"—the central bank managed just one short-term interest rate and expected that to be enough to meet its goals for inflation and unemployment. That rate is the federal-funds rate, which banks charge one another on overnight loans.
In the AFC era—"After Financial Crisis"—the Fed is working through a broader spectrum of interest rates. By using its bond portfolio and the messages it sends about future plans, the Fed is seeking to influence an array of long-term interest rates, mortgage rates and other borrowing costs that touch households, businesses and investors.
In June 2011, Fed officials devised a strategy for exiting its easy-money policies someday, envisioning an eventual return to something like the PFC era. Under the plan, the Fed would sell its mortgage securities over time to shrink its portfolio and get back to a world in which it was just using the federal-funds rate.
A closer look at the Fed's evolving exit strategy shows that the AFC era might last a long time. Mr. Bernanke told lawmakers last month in his semiannual report to Congress on monetary policy that the Fed would likely update the strategy. He and other Fed officials have suggested that under a new plan, the Fed could calibrate its sales of mortgage bonds to shape the direction of long-term rates.
"Adjustments to the pace or timing of asset sales could be used, under some circumstances, to dampen excessively sharp adjustments in longer-term interest rates," Mr. Bernanke said in a Denver speech this month.
Another approach some officials have discussed is reducing their holdings, when the time comes, by simply allowing their bonds to mature, rather than by selling them. That would reduce the risk that outright sales would disrupt markets and cause interest rates to jump sharply.
Economists surveyed by the Journal, on average, said they didn't expect the Fed's balance sheet to return to normal—not bloated with the many extra bonds purchased in its quantitative-easing programs—until December 2019. More than a decade after the financial crisis ended, in other words, the Fed might still be a big player in long-term bond markets, directly shaping long-term rates.
Ms. Coronado, of BNP, sees the Fed holding on to longer-term bonds for 30 more years.
By turning more dials to influence a wider array of interest rates, Fed officials could be in a better position to prevent another financial crisis. But they also could face more complicated decisions, new opportunities for error and criticisms for being more intrusive.
Critics of the Fed's policies fear the central bank will start tightening credit too late to forestall a sharp rise in inflation or a new financial bubble.
Of course, the Fed's policy is subject to change in response to myriad scenarios. Fed officials have said they will keep short-term interest rates near zero until the jobless rate drops below 6.5%, something that they don't expect to happen until 2015. If unemployment falls faster than expected, or if inflation takes off, or if new financial bubbles emerge, the Fed might decide to hit the brakes sooner than anybody is expecting and in ways that aren't now on the table.
But the Journal panel doesn't see that happening. The economists predicted the jobless rate wouldn't hit 6.5% until June 2015, and they see inflation remaining near 2% for the foreseeable future. They also said markets weren't overheating, despite a recent run of stock-market highs; on a scale of 0 to 10, they said froth in markets was about a 5.
The Fed, by the economists' estimation, could be operating in AFC mode for a long time.
To the Judges:
As the dust settles from the financial crisis, the Federal Reserve stands as one of the most powerful yet least understood institutions in the country. It is also one of the most controversial, for it is engaged in a risky policy experiment of historic proportions. By injecting huge amounts of money into a wheezing American economy, the Fed has sparked a debate over whether it has saved that economy or merely created the next set of financial bubbles that will bring it crashing down again.
Articles on the Fed’s behind-closed-doors monetary-policy decisions alerted readers to shifting stances well before they became public. In one notable example, a May 11 article by Wall Street Journal reporter Jon Hilsenrath disclosed what officials said openly only later: that the Fed was mapping an exit strategy from its policy of pumping billions of dollars into the economy by buying Treasury bonds. That article roiled financial markets from New York to Tokyo, sending stocks down and the dollar up, and dominating a full weekend’s economic conversation. Later, the Journal showed readers how Mr. Bernanke sought to manage a raucous internal debate on the matter.
The Fed is designed to be independent of elected politicians. But congressional oversight hearings can be a sorry spectacle. That makes the role of well-informed reporters such as Mr. Hilsenrath all the more important in keeping the Fed accountable. His questions at Mr. Bernanke’s news conferences are watched nearly as closely as the chairman’s answers.
The Journal also held the Fed and its decision-makers accountable by critically examining their words and deeds. Moreover, Mr. Hilsenrath and colleagues moved beyond the printed word to connect with readers in new ways. An online database built by the Journal assessed the forecasting records of 14 top Fed policy makers by comparing more than 700 individual predictions they made over four years to what actually happened. Mr. Hilsenrath also broke new ground in online video “Spreecasts” in which he fielded questions directly from readers about developments at the Fed.
Taken together, these efforts explained the Fed more clearly and in more depth than ever, and at a moment when that mattered more than ever. They represented not just the work of one year, but the culmination of years of careful and in-depth coverage of the Fed by Mr. Hilsenrath. I believe those efforts are worthy of the Pulitzer Prize for national affairs reporting.
Sincerely,
Gerard Baker
Biography
Jon Hilsenrath is the chief economics correspondent for The Wall Street Journal, where he is responsible for covering the Federal Reserve.
Winners
Prize Winner in National Reporting in 2014:
David Philipps
For expanding the examination of how wounded combat veterans are mistreated, focusing on loss of benefits for life after discharge by the Army for minor offenses, stories augmented with digital tools and stirring congressional action.
National Reporting
Finalists
Nominated as finalists in National Reporting in 2014:
John Emshwiller and Jeremy Singer-Vine
For their reports and searchable database on the nation's often overlooked factories and research centers that once produced nuclear weapons and now pose contamination risks.
The Jury
The Jury
Rick Hirsch(Chair )
managing editor
Rebecca Blumenstein
deputy editor-in-chief
Kevin Merida
managing editor
Rene Sanchez
executive editor
Jeff Taylor*
editor and vice president/news
Winners in National Reporting
Lisa Song, Elizabeth McGowan and David Hasemyer
For their rigorous reports on flawed regulation of the nation's oil pipelines, focusing on potential ecological dangers posed by diluted bitumen (or "dilbit"), a controversial form of oil.
David Wood
For his riveting exploration of the physical and emotional challenges facing American soldiers severely wounded in Iraq and Afghanistan during a decade of war.
Jesse Eisinger and Jake Bernstein
For their exposure of questionable practices on Wall Street that contributed to the nation's economic meltdown, using digital tools to help explain the complex subject to lay readers.
Matt Richtel and members of the Staff
For incisive work, in print and online, on the hazardous use of cell phones, computers and other devices while operating cars and trucks, stimulating widespread efforts to curb distracted driving.
2014 Prize Winners
Donna Tartt
A beautifully written coming-of-age novel with exquisitely drawn characters that follows a grieving boy's entanglement with a small famous painting that has eluded destruction, a book that stimulates the mind and touches the heart.
Annie Baker
A thoughtful drama with well-crafted characters that focuses on three employees of a Massachusetts art-house movie theater, rendering lives rarely seen on the stage.
Alan Taylor
A meticulous and insightful account of why runaway slaves in the colonial era were drawn to the British side as potential liberators.
Megan Marshall
A richly researched book that tells the remarkable story of a 19th century author, journalist, critic and pioneering advocate of women's rights who died in a shipwreck.