Thursday, January 3, 2013

FOMC Minutes: Read 'Em And Weep

FOMC minutes, Dec. 11-12, 2012:
While almost all members thought that the asset purchase program begun in September had been effective and supportive of growth, they also generally saw that the benefits of ongoing purchases were uncertain and that the potential costs could rise as the size of the balance sheet increased. 

Various members stressed the importance of a continuing assessment of labor market developments and reviews of the program's efficacy and costs at upcoming FOMC meetings. 
In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases. Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet.

As JFK said in slightly different words "Fooled again." So much for the triumph of monetarism at the Fed. It turns out that the College of Cardinals is not 100% behind the pope.

Bernanke is trying to drive down the real funds rate by raising inflation expectations. If he could get expectations up to say 3%, that would make the real rate -3%, which would be stimulative. The whole point of QE3 is to commit to print money until unemployment falls to 6.5% from its current level of 7.7%, and thus raise inflation expectations. They were supposed to add $1 trillion to the monetary base in 2013. 
Now they say that "the benefits of ongoing purchases are uncertain and the potential costs could rise as the size of the balance sheet increased." Is that so?

There is absolutely no point in making forward-looking statements unless they have credibility. How hard is that to understand? We should have learned this from twenty years of  “anti-deflationary” policies at the Bank of Japan.

We learned today that Bernanke is still not in charge, and that the cats he has been trying to herd are still running in different directions. It is not “his” FOMC. The committee seems to feel that it is committed to nothing other than to make “continuing assessments”. Don't go out on a limb.

The committee’s forward guidance now has almost no credibility. At any moment, some of the cats can stick their heads up  and say “We think that’s enough”. End of QE3!

There are two ways to conduct monetary policy: offer credible guidance which can by itself change market behavior; or failing that, just go ahead and follow through with whatever it is that you said you were going to do. To offer non-credible guidance while reserving the right to stop expansion at any time is the worst way to do it, as Bernanke knows very well.

I hate to say it, but Bernanke is giving monetarism a bad name. He isn’t doing it right. Now, with expectations up in the air and the monetary base stalled, people are going to start saying that QE3 hasn’t worked and that “monetary policy has lost its efficacy”. Actually, they are already saying that.

So let me remind you of one salient fact: the monetary base stands today at $2.6 trillion. Eighteen months ago, in June of 2011, the monetary base was $2.6 trillion. There has been no expansion of the Fed’s balance sheet since the announcement of QE3, none. And so you may well ask “Will there ever be an expansion of the monetary base?’ And I can only answer, “Definitely, unless the hawks stop it at the next meeting”. There may never be a QE3. It may all have been a dream.

So all of the hoopla about the intellectual sea-change at the Fed now looks misplaced. We don’t have a monetarist Federal Reserve; we have a monetarist Federal Reserve chairman. It’s like the Supreme Court: we don’t have an originalist court, we have an originalist chief justice. The other member get to vote however they please.

This is all very disappointing.

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