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.
Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
To have unlimited access to our content including in-depth commentaries, book reviews, exclusive interviews, PS OnPoint and PS The Big Picture, please subscribe
US Treasury Secretary Scott Bessent’s defense of President Donald Trump’s trade tariffs as a step toward “rebalancing” the US economy misses the point. While some economies, like China and Germany, need to increase domestic spending, the US needs to increase national saving.
thinks US Treasury Secretary Scott Bessent is neglecting the need for spending cuts in major federal programs.
China’s prolonged reliance on fiscal stimulus has distorted economic incentives, fueling a housing glut, a collapse in prices, and spiraling public debt. With further stimulus off the table, the only sustainable path is for the central government to relinquish more economic power to local governments and the private sector.
argues that the country’s problems can be traced back to its response to the 2008 financial crisis.
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.
Introductory Offer: Save 30% on PS Digital
Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
Subscribe Now