In his highly technical speech today, Fed Governor Jeremy Stein summarized the findings from recent research he has conducted on the impact of monetary policy on forward real rates. He obviously has too much free time. In the speech, he said a few words about the previous week’s FOMC meeting. He voted not to taper QE. However, he said, “It was a close call for me….” He explained his wavering as follows:
The Chairman laid out a framework for winding down purchases in his June press conference. Within that framework, I would have been comfortable with the FOMC's beginning to taper its asset purchases at the September meeting. But whether we start in September or a bit later is not in itself the key issue--the difference in the overall amount of securities we buy will be modest. What is much more important is doing everything we can to ensure that this difficult transition is implemented in as transparent and predictable a manner as possible. On this front, I think it is safe to say that there may be room for improvement.
He concluded that he would like to see tapering tied automatically to the unemployment rate:
Achieving the desired transparency and predictability doesn't require that the wind-down happen in a way that is independent of incoming data. But I do think that, at this stage of the asset purchase program, there would be a great deal of merit in trying to find a way to make the link to observable data as mechanical as possible. For this reason, my personal preference would be to make future step-downs a completely deterministic function of a labor market indicator, such as the unemployment rate or cumulative payroll growth over some period. For example, one could cut monthly purchases by a set amount for each further 10 basis point decline in the unemployment rate. Obviously the unemployment rate is not a perfect summary statistic for our labor market objectives, but I believe that this approach would help to reduce uncertainty about our reaction function and the attendant market volatility. Moreover, we would still retain the flexibility to respond to other contingencies (such as declines in labor force participation) via our other more conventional policy tool--namely, the path of short-term rates.