In a sign of the tensions, SEC Commissioner Michael Piwowar complained yesterday that banking regulators were crowding out the agency in decisions that affect capital markets. The FSOC “represents an existential threat” to the SEC, he told the U.S. Chamber of Commerce in Washington.
Former Treasury Secretary Lawrence Summers voiced doubts about the ability of policy makers to spot crises before they happen and the efficacy of the tools they intend to employ to head dangers off. “I worry about macro-prudential complacency,” the Harvard University professor told a panel at the World Economic Forum in Davos, Switzerland, on Jan. 24.
Economy’s Performance
As Yellen prepares to ascend from her current post as Fed vice chairman on Feb. 1, she does have one big thing going for her. The economy just wrapped up its best six-month performance since the recession ended in June 2009, according to estimates by economists at Goldman Sachs and Morgan Stanley in New York.
Further gains are forecast for 2014. Yellen, 67, told Time magazine earlier this month that she is looking for gross domestic product to expand by 3 percent or more this year, after averaging about 2.5 percent so far during the recovery.
Faster growth would still pose some tricky issues for the Fed in its dealings with financial markets. Bernanke and his colleagues have tried to hold down long-term interest rates by promising to keep the short-term rate they control near zero for a long time. If the economy picks up steam, investors may begin to doubt that commitment and push up bond yields in response, triggering reverberations elsewhere.
Forward Guidance
The Fed’s forward guidance strategy already has “crumbled,” said Marvin Goodfriend, a former central bank official who is now a professor at Carnegie Mellon University in Pittsburgh. At 6.7 percent, the unemployment rate is just above the 6.5 percent threshold that the central bank had set for the start of its discussions on raising rates. Yet it’s still buying bonds in an effort to ease financial conditions.
Bernanke and his colleagues have sought to de-emphasize the significance of the jobless marker by saying that they expect to hold the overnight federal funds rate near zero “well past the time that the unemployment rate declines below 6.5 percent.”
The trouble with such less specific forward guidance is that it hasn’t worked in the past, said Roberto Perli, a managing director at Cornerstone Macro LP in Washington.