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 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.

The World’s Opinion Page

Help support Project Syndicate’s mission.

  1. Sean Gallup/Getty Images

    Angela Merkel’s Endgame?

    The collapse of coalition negotiations has left German Chancellor Angela Merkel facing a stark choice between forming a minority government or calling for a new election. But would a minority government necessarily be as bad as Germans have traditionally thought?

  2. Trump Trade speech Bill Pugliano/Getty Images .

    Preparing for the Trump Trade Wars

    In the first 11 months of his presidency, Donald Trump has failed to back up his words – or tweets – with action on a variety of fronts. But the rest of the world's governments, and particularly those in Asia and Europe, would be mistaken to assume that he won't follow through on his promised "America First" trade agenda.

  3. A GrabBike rider uses his mobile phone Bay Ismoyo/Getty Images

    The Platform Economy

    While developed countries in Europe, North America, and Asia are rapidly aging, emerging economies are predominantly youthful. Nigerian, Indonesian, and Vietnamese young people will shape global work trends at an increasingly rapid pace, bringing to bear their experience in dynamic informal markets on a tech-enabled gig economy.

  4. Trump Mario Tama/Getty Images

    Profiles in Discouragement

    One day, the United States will turn the page on Donald Trump. But, as Americans prepare to observe their Thanksgiving holiday, they should reflect that their country's culture and global standing will never recover fully from the wounds that his presidency is inflicting on them.

  5. Mugabe kisses Grace JEKESAI NJIKIZANA/AFP/Getty Images

    How Women Shape Coups

    In Zimbabwe, as in all coups, much behind-the-scenes plotting continues to take place in the aftermath of the military's overthrow of President Robert Mugabe. But who the eventual winners and losers are may depend, among other things, on the gender of the plotters.

  6. Oil barrels Ahmad Al-Rubaye/Getty Images

    The Abnormality of Oil

    At the 2017 Abu Dhabi Petroleum Exhibition and Conference, the consensus among industry executives was that oil prices will still be around $60 per barrel in November 2018. But there is evidence to suggest that the uptick in global growth and developments in Saudi Arabia will push the price as high as $80 in the meantime.

  7. Israeli soldier Menahem Kahana/Getty Images

    The Saudi Prince’s Dangerous War Games

    Saudi Arabia’s Crown Prince Mohammed bin Salman is working hard to consolidate power and establish his country as the Middle East’s only hegemon. But his efforts – which include an attempt to trigger a war between Israel and Hezbollah in Lebanon – increasingly look like the work of an immature gambler.