Martin Luther King Jr. once said "A genuine leader is not a searcher for consensus but a molder of consensus." The leader of the U.S. Federal Reserve, Chairman Ben Bernanke, is having trouble molding consensus around the economic outlook.
At the June meeting of the Fed's Open Market Committee, policymakers voted to keep bank interest rates near zero percent and continue support for the mortgage market. But not all members of the committee agreed with the current policy.
One committee member said the Fed should do more and push for higher inflation "in light of recent low inflation readings." Another member said the Fed should do less because "the continued high level of monetary accommodation increased the risks of future economic and financial imbalances ...."
Further, the committee members differ widely on their forecasts for what the economy will look like next year. Members are forecasting economic growth in 2014 in a range from 2.2 percent to 3.6 percent, and unemployment could be as low as 6.2 percent or as high as 6.9 percent. That's a difference of more than 1 million jobs.
Idaho's unemployment rate at 6.9 percent is already below the national average of 7.6 percent. If economic growth at the national level climbs to the top of this forecast range from the current rate of 2.4 percent, our state could see significant employment gains. Over the past two decades, strong income growth at the national level has meant even stronger growth in Idaho.
Unfortunately, policymakers see a sluggish economy as equally likely.
The uncertainty over economic conditions and the appropriate monetary policy rattled the financial markets. For the week ending June 21, the Dow Jones Industrial Average lost 1.8 percent and was 4 percent off its high for the year. Bond prices also fell, raising interest rates for business lending and home mortgages alike.
The financial markets are relying heavily on extraordinary monetary policies. The latest price volatility lends credence to the one member's concern about financial imbalances.
The Federal Reserve was created 100 years ago in response to financial panics. It operates the monetary policy of the United States through the open-market committee. Monetary policy is any action undertaken by the U.S. central bank - the Fed - to influence the availability and cost of money and credit.
Historically, the open-market committee used only three tools of monetary policy - open-market operations, the discount rate and reserve requirements. The near zero interest rate target is part of both open-market operations and the discount rate. These rates influence banks' ability to provide credit.
Credit availability also is influenced by the reserve requirement, or what banks must hold against deposits. The Fed can affect the amount of the money circulating in the economy by altering this requirement, but it rarely uses the tool because of potential disruptions to banking operations. This policy tool also is not effective when banks hold a lot of excess reserves, as they do today ($1.9 trillion).
During the financial crisis of 2008, the Federal Open Market Committee moved beyond its three traditional policy tools and began directly purchasing long-term bonds issued by the federal government or backed by its housing agencies. Today, these purchases amount to more than $85 billion a month.
Apparently, the financial markets have come to rely on this new money, and any hint of a change because of changing economic forecasts is not taken lightly. The markets don't like uncertainty.
If Chairman Bernanke wants to leave a legacy of good leadership, he will need to mold a stronger consensus among the policymakers on his board.