Yesterday I had the opportunity to attend a presentation by Sandy Pianalto, President of the Federal Reserve Bank of Cleveland. She provided her perspectives about what the Fed was seeing in the data/ thinking at the time they took the actions taken since mid-2008 through today (i.e. QE1, 2, Operation Twist, etc.).
1) The revisions for the data they saw at the time of the decisions to implement QE1/2 turned out to be significantly worse than they had anticipated at the time those decisions were made. They were aware the economy was in a dire situation, in “uncharted waters” that would require out-of-the-box creative thinking in order to navigate the economic terrain. However, for a host of reasons they were taken back by how dire later data showed the situation actually had been. This then led to the subsequent extensions and new programs.
2) Several times she alluded to the risks of the current size of the Federal Reserve Balance Sheet and was clear they are very aware of the risks that have been created although they are admittedly in uncharted territory. The tools required to address this will have to be creative. They have come up with some ideas and have been testing them to see how they “work”, although she conceded the results might be different when the time comes to implement these tools on a broad spectrum. Her point was to demonstrate they are being proactive and not waiting until a later date to develop and test a new “Tool Kit”.
3) She spoke of Bernanke; how he has been different from his predecessor and that many of his changes have been subtle to the outside observer but have been impactful. Here are some of the examples she gave:
-Bernanke is much more communicative that his predecessors, she specifically highlighted that this is one of the “new tools” they feel has been used effectively during and since the crisis.
-The comments after the Fed meetings used to be called the Chairman’s Comments. He changed that, they are now the Committee’s Comments. (She got a chuckle from everyone as she commented on how difficult it can be to get 19 people to sign off on the statement to be issued. These approval conversations are just now starting to be seen in the Fed minutes as they are released on a five-year delay.)
-There is a much more collaborative effort between the Fed Chairman/ Fed Govenors/ Fed Presidents than had existed prior to Bernanke.
4) The Fed stopped providing projected dates of when their open market programs might end and instead have provided data points that represent the economic environment they are seeking. (Ex: 6% unemployment) The dates they initially provided were based on when they expected to see the data reach levels they wanted to achieve before changing course (like 6% unemployment). As it became apparent that the time horizons to achieve the levels were becoming longer, they decided it would be more appropriate to provide the data points themselves rather than guess the dates at which those numbers might materialize in the economy. She was very specific to note these numbers are not targets but rather signposts they want to see before they begin to consider changing course.
5) The 4thdistrict region that makes up the Fed Reserve Bank of Cleveland (Ohio, PA, E. Kentucky & northern panhandle of W. Virginia) is experiencing slightly better growth than the country overall due to the manufacturing base – Something that has not happened in 50 years.
6) Her expectations for 2013 GDP growth is approximately 2%
7) There was a question as to why there was no longer a focus on money supply and money flows (velocity of money). In the past this information was some of the most important data observation points for economists and strategists. She indicated that this data is not as reliable because people/corporations think so differently about money and holding onto cash today and thus behaviors have changed, consequently the money supply numbers represent less interesting data to examine at this time.
As always we welcome your comments and questions.
Denise Farkas, CFA