Kansas City Fed President Thomas Hoenig continues to believe rates need to rise, which leaves him in opposition to the decision made just over a week ago to maintain the size of the Fed's balance sheet. St. Louis Fed President James Bullard, meanwhile, has talked of going even further than what's been done thus far, suggesting the Fed could again expand its balance sheet if the recovery falters further. Minneapolis Fed leader Narayana Kocherlakota thinks it's all a tempest in a tea cup, describing the Fed actions as technical and misunderstood by markets as a sign of growing worry over the outlook.

Bullard, however, framed the issue in a way that lined up neatly with the prevailing market view. He told The Wall Street Journal in an interview "I thought we should be in a position to return to a quantitative easing program if we got further disinflation."

Kocherlakota muddied the waters Tuesday, saying the market got the issue wrong. Low rates are driving more mortgage prepayments than the Fed anticipated, so purely for technical reasons, the Fed needs to act to keep its portfolio size up. "I would say that there is no new information about the current state of the economy to be learned from the FOMC's actions or its statement," the policymaker said.

Kocherlakota is refreshingly direct about it.  To say that there is "no new information" certainly puts the markets in their place.  That sort of candor, along with a plausible technical reason, is helpful to outside observers, even if it seems to "muddy the waters."  Kocherlakota's view is consistent with the notion that the Fed needs to make sure that they don't accidentally contract.  Certainly, that is a sensible position.  The question is whether it goes far enough.

Bullard wants to make sure the Fed can go further if they need to.  Will they?  That remains to be seen.  And in the remainder of 2010, that will be the big question.

It remains somewhat unclear to me what the Fed can do to improve the labor market, which is the primary concern now.  Fiscal policy, in a perfect world, would be better suited for that although fiscal policy is being held hostage to politics, and probably will be for a while.  So everyone will be looking to the Fed to do something.  Aside from making sure they don't passively and unintentionally contract the credit supply, it's not clear how they can achieve the effects that people want.

Ultimately, you can't quite square the two positions. The best I can do is to say that I agree with Kocherlakota today, but Bullard might be right tomorrow.  Pulling the trigger too early could be destabilizing and may not necessarily have the positive effects you want.  Policy lags notwithstanding, I wouldn't be ready to take the risk yet.

Finally, the idea that the world's rich countries need to cut spending and raise taxes has a lot of truth to it. The United States, Europe and Japan have all made promises they cannot afford. Eventually, something needs to change.

In an ideal world, countries would pair more short-term spending and tax cuts with long-term spending cuts and tax increases. But not a single big country has figured out, politically, how to do that.

So true.  I, too, would be cautious about allowing the economy to slip.  But is it that we need more stimulus, or is it that the original stimulus wasn't done right?  If the latter, that's a problem if we really do need something more, as there's little hope that they'd get it right the next time.

Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.

Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee's flexibility to begin raising rates modestly.

Mark Thoma thinks that fiscal and monetary policy should be used more aggressively, citing this David Leonhardt column in the NY Times.  Leonhardt's column is worth quoting at length as it pretty succinctly describes the feeling that has been building in my mind and I'm sure in others over the first half of this year.

Ben Bernanke believes that he and his Federal Reserve colleagues have the ability to lift economic growth at their meeting this week. The Fed, he has said, "retains considerable power to expand aggregate demand and economic activity, even when its accustomed policy rate is at zero," as it is today.

Mr. Bernanke also believes that the economy is growing "not fast enough," as he recently put it. He has predicted that unemployment will remain high for years and that "a lot of people are going to be under financial stress."

Yet he has been unwilling to use his power to lift growth and reduce joblessness from near a 27-year high. Instead, Fed officials are expected to announce on Wednesday that they have left their policy unchanged, even if they acknowledge that the economy has recently weakened.

How can this be? How can Mr. Bernanke simultaneously think that growth is too slow and that it shouldn't be sped up? There is an answer -- whether or not you find it persuasive.

Above all, top Fed officials are worried that financial markets are fragile. They are not so much worried about inflation, the traditional source of Fed angst, as they are about upsetting the markets' confidence in Washington. Yes, investors remain happy to lend the United States money at rock-bottom interest rates, despite our budget deficit and all of the emergency Fed programs that will eventually need to be unwound. But no one knows how long that confidence will last.

In effect, Mr. Bernanke and his colleagues have decided to accept an all-but-certain downside -- high unemployment, for years to come -- rather than risk an even worse situation -- a market panic, a spike in long-term interest rates and yet higher unemployment. As the last few years have shown, market sentiment can change unexpectedly and sharply.

If you fear that the recovery is about to stall, today's news on new home sales probably increased your worries.  And in the midst this, an FOMC member, Hoenig (Kansas City), dissented from the consensus opinion, believing "that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee's flexibility to begin raising rates modestly."

Hoenig and Bernanke have similar concerns about stability.  Hoenig is of the opinion that keeping rates low will lead to risks to that stability.  Bernanke seems to be hoping that they can maintain the low rates, but seems to be drawing the line at providing any further support like, say, buying long-term bonds and pushing those rates down as well.

But what if GDP stalls in the 2nd half of 2010?  Do you pull the trigger and use unconventional monetary policy?  What is worse, another year of 10% unemployment or instability in the financial markets?  If you wait too long to decide, will you get both?

The person in the big chair has to make that decision, and for now he's content to sit on low short-term rates, even if that makes it hard to reverse course later.  And he's keeping his powder (what little remains of it, at least) dry.

As it seems to me that price pressures seem to be even more muted right now than 6 months ago, I would want to be ready to do something unconventional in case Congress has a fit of anti-deficit hysteria at the same time GDP stalls and unemployment edges back up.  We do not have to repeat past mistakes.

The 2nd half could go either way, but I'm a little more pessimistic today than a month ago.

On a related note, Bill Conerly thinks that the Fed has actually been doing a little quantitative tightening, but thinks they should continue easing.  Connerly sees tightening in the slight reductions lately in bank credit, slower growth of M2, and decline of MZM.  Maybe these are just short-term aberrations, but they are worth noting.  Eventually these quantities should return to a more normal trend reflecting a neutral stance, but now is not the time for that yet.  If we see this continue for a couple more months, I would be concerned about this apparent stealth tightening.  Stay tuned.

You would think that there were few barriers to switching cellphones. But the carriers try to make it harder to switch by locking customers into two-year contracts with high early-termination fees. And each handset maker also inspires loyalty by continually making improvements in its phones, as Apple announced last week for its iPhone. Some people may complain incessantly about their iPhone and AT&T's service for it, but not that many are switching. And that's just the way the companies have intended it.

...

In a classic bit of economic sleuthing, Minjung Park, an assistant professor of economics at the University of Minnesota, looked at the impact of the Federal Communications Commission's mandate that customers could keep their phone numbers when they switched carriers, starting in late 2003 in large markets and mid-2004 in smaller ones. (The phone companies had fought the decision because nonportability had been a very effective way to hold onto customers.)

She examined more than 100,000 calling plans and found that the prices of wireless plans dropped by as much as 6.8 percent in the seven months after the rule change. After adjusting for the overall trend in wireless prices, she calculated that the savings totaled $845 million during that period.

The article goes on to point out that economic theory would also predict that once they have you locked-in to the a particular phone technology (e.g. iPhone) they will raise the price on you.

Yep.

The bottom line? The Fed wants to get the junk off its balance sheet and return to a situation in which it has about $1 trillion in assets, the lion's share of them in the form of government bonds. To do so, it will need to rid itself of about $1.3 trillion in assets. That's a lot. But when you add up the components of the balance sheet that are shrinking, the task doesn't seem quite as daunting. By the end of 2011, by my rough calculations, at least $300 billion of the Fed's current assets will be gone with a substantial additional amount on the way out--and all without the Fed having to stage a huge sale of assets.

It's April 15. Have you filed your taxes yet?

When I was in college, the local Dairy Queen ice cream stand would give away free chocolate sundaes from 10pm to midnight on April 15. You see, it was just a couple blocks from the post office (and the college). But the event became a college tradition (even though none of us actually waited until the 15th to file our taxes).

The line was longer at the Dairy Queen than at the post office. Much longer. And much happier!

I hope they still do it. If you're in Moorhead, Minnesota tonight, have a sundae for me.

The cash-for-clunkers program also exemplifies poorly targeted spending--there were ways of spending the money that would have stimulated the economy more in the short run and helped the economy to restructure in the ways that were needed for the long run (p. 70).

What you are ignoring is that the objective of cash for clunkers was to eliminate the inventory overhang at the dealers so that firms would resume auto production.

You are evaluating the program on a completely different basis than it was designed to achieve.

It is like saying the doctor set my broken arm so it would heal properly but he failed because he did not make me look like a movie star.

And yet, the excitement over the program was, as you will recall, pretty intense, was it not?  It was something tangible for people to hold onto, yes.  There may have been some "animal spirits" effect on consumer confidence.  Politically, I think the administration got a lot more invested in the whole idea than spencer is admitting.

There is a way to test this going forward, of course.  Look at what the politicians say about cash-for-clunkers in the fall campaign.