The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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February 21, 2014

What Is the Stance of Monetary Policy?

Will the Federal Open Market Committee's (FOMC) current large-scale asset purchase program, so-called QE3, continue to melt away as spring arrives? The release of the minutes from the January meeting of the FOMC, along with commentary from various participants in that meeting (noted in rapid succession here, here, and here, for example) have left the distinct impression that the answer is most probably yes.

The anticipated winding down of asset purchases almost inevitably invokes a habit of language concerning what it all means for the stance of monetary policy. From the New York Times, for example, we have this (emphasis added):

When Federal Reserve officials last met at the end of January, they were surprised by the strength of the economy, cheered by the optimism of consumers and convinced they should continue to dismantle the Fed's economic stimulus campaign, according to an account the Fed released Wednesday.

The sentiment expressed in that highlighted passage is front and center at the G-20 meetings, currently taking place in Australia (again, emphasis added):

Setting the scene for this weekend's Group of 20 meetings, Australian Treasurer Joe Hockey's main challenge was to avoid appearing partial in the escalating blame-game between the U.S. and developing countries over the recent exodus of capital from emerging markets….

Emerging market countries like India and Brazil have blamed the wide-scale selloff in local stocks, bonds and currencies on the Federal Reserve's plan to exit gradually from monetary-stimulus policies, which last year began sending investors into a panic.

Here's the thing. It is not at all clear that winding down asset purchases means an exit from or dismantling of monetary stimulus, gradual or otherwise. In Atlanta Fed President Dennis Lockhart's words yesterday:

In our public remarks over much of last year, my colleagues and I stressed a couple of very important messages. First, even with the phase-out of asset purchases, the basic stance of policy remains highly accommodative. To translate, the Committee intends to keep interest rates very low. The second message was that the QE program and the Fed's policy interest-rate target are two separate tools of policy. Consequently, we can wind down the asset purchases—a program that was meant to provide temporary, supplemental "oomph" to the low interest-rate policy—and preserve the accommodative positioning of policy appropriate for the reality of our economic situation.

But those are not just words. Several months back, Jim Hamilton publicized the work of Cynthia Wu and Dora Xia (former and current students of his), who have developed a method of using term structure data to infer the "shadow," or implicit, monetary policy rate. (Follow-up posts appeared thereafter at Econbrowser—here and here—and from the crew here at macroblog.)

Just recently, the Wu-Xia data has been updated, giving us a first glance at the post-taper shadow policy rate (see the chart):

Both Treasury yields and the shadow policy rate did in fact spike last June following then-Chairman Ben Bernanke's post-FOMC press conference, wherein he signaled that the asset-purchase taper was indeed on the table. But he also made the point that bringing down the QE pillar of the Fed's policy mix is decidedly not the same thing as bringing monetary stimulus to an end, a message that was subsequently emphasized by Fed officials many times, in many forums.

Though financial market participants may have been convinced that the taper meant tightening initially, it does appear that communications and forward guidance have done the trick of more than reversing that initial impression. At the very least, the Wu-Xia calculations are consistent with that interpretation.

David Altig By Dave Altig, executive vice president and research director at the Atlanta Fed

February 21, 2014 | Permalink


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Could you explain the economic meaning of these shadow rates? I do not understand the concept.



Posted by: François | February 22, 2014 at 08:23 AM

So how is one to interpret the Wu-Xia policy rate chart... what does it mean that since June there has been apparently what appears to be a 150 bps "decrease" in the rate?

Hamilton proposes that it’s going to be helpful to have an alternative to the fed funds rate to summarize the stance of monetary policy.

If the point is... that since June 2013 the market has re evaluated Fed policy... surely the simplest thing to look at is the January 2015 FED Funds futures... or any of the OIS curve... those have rallied more than 50 bp's since June of 2013...

Posted by: stan jonas | February 24, 2014 at 04:55 PM

The Fed's stance is restrictive. Money growth has declined from 10% in 2012 to 6% today. Inflation is far below target, and nominal growth is 2-3% below where it was pre-crash. QE has had no observable impact on money growth.

Posted by: Christopher Mahoney | March 28, 2014 at 05:41 PM

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