Tags: Fed | FOMC | guidance | unemployment

WaPo: High Turnover at Fed Adds to QE Tapering Uncertainty

Tuesday, 10 Sep 2013 07:56 AM

By Michael Kling

Just as the Federal Reserve is preparing to exit its quantitative easing stimulus, top Fed officials are exiting.

Up to half of the Fed's Federal Open Market Committee (FOMC) members, the central bank's policy-setting committee, could be new next year, according to The Washington Post.

That high turnover of top Fed officials adds even more uncertainty to the already uncertain plan to wind down, or taper, the Fed's bond purchases.

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Even a slight shift in the Fed's philosophy and actions could have an enormous impact on the stock market, interest rates and bond prices.

The Fed's guidance on its action gives firms and investors a degree of certainty about the future. For instance, the central bank has said it will keep buying bonds until the unemployment ate falls to 7 percent if inflation remains contained, and that it will keep short-term rates low until unemployment reaches 6.5 percent or inflation exceeds 2.5 percent.

But will new Fed officials stick to guidance given by their predecessors?

"It’s a legitimate question to ask: Are those messages that the Fed has sent over the past several months correct?" Roberto Perli, head of monetary policy research at Cornerstone Macro, told The Post. "The answer is, it depends."

"A different set of people on the Fed could have a different view on what the appropriate unemployment rate is," Nigel Gault, co-chief economist at the Parthenon Group, told The Post. "The Fed can change its mind."

At the top of the departure list is Fed Chairman Ben Bernanke. But he's not the only one. A number of Fed Governors have just left or are soon departing.

In all, the 12-member FOMC will have between four and six members next year, The Post noted. Elizabeth Duke resigned at the end of August, Sarah Bloom Raskin has been nominated deputy Treasury secretary, Jerome Powell's term ends in January, Fed Vice Chairman Janet Yellen may move on if not nominated chairman and Cleveland Fed President Sandra Pianalto will retire early next year.

Markets have focused on who will be replacing Bernanke as chairman, with commentators portraying the decision as a two-horse race between Yellen and former Treasury Secretary Larry Summers.

Some pundits argue that that Summers is more likely to increase uncertainty.

"Mr. Summers’s dazzling intellect would make for bravura public performances, but he would be more likely to unsettle the markets with unscripted comments and to alienate both other Fed governors and lawmaker," opined The Economist.

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