Wednesday, June 19, 2013
Bernanke Gives Up
Today was FOMC Day. The message was that the committee plans to start to taper QE this fall, and end it next summer, assuming its forecasts for unemployment and inflation don’t change. The Fed plans to continue its Zero Interest Policy for a good while after the end of QE. This shocking news sent the market down by 200 points, and caused bond prices to fall as well. I don’t understand what new information was provided today, but I guess some people were expecting QE to go on forever.
There was one bit of disappointing news, at least to me, and that is that the Fed doesn’t see inflation at 50% below target as a problem; they say it’s temporary. I guess they’re serving Japanese Kool-Aid at the Eccles Building these days. Since the purpose of QE is to lower the real funds rate by raising inflation expectations, you’d think that 1% wouldn’t be too helpful.
Bernanke said that “These large and growing holdings will continue to put downward pressure on longer-term interest rates.” How does he know? Bond rates are now rising, for some reason. Maybe the Chinese are selling?
This is what I see in terms of interpreting the Fed’s policy stance:
1. Moderate (5-7%) money growth.
2. The lowest inflation since the Crash (.7%).
3. Very low inflation expectations.
4. Very low LT interest rates.
5. Very low and falling (3.4%) nominal growth.
6. Low real growth (1.8%).
7. High (and rising) unemployment (7.6%).
That is not the picture of “extraordinary accommodation” or “massive monetary stimulus”. Bernanke says that he has his foot on the accelerator but he must be driving a lawnmower. The Fed is doing nothing for the economy as all of the telemetry shows.
Perhaps Bernanke has given up trying to convert the committee to Bernankeism? Maybe he’s just exhausted and coasting to retirement? Maybe he wants to give Janet Yellen a chance to be a hero next year? I don’t know, but it’s quite disappointing. The world’s biggest economy is a terrible thing to waste.