Fed Blinked On Tapering QE3 - Has Monetary Policy Run Out Of Gas?

September 23, 2013 Kathleen Sullivan Leave a comment

Why did the Fed blink and not start tapering the $85 Billion per month QE3 Bond Purchase Program?

Fed Chairman Bernanke offered two reason: 1. fear of higher interest rates, 2. risk of "fiscal" drag from congress.  

Here are two charts that highlight the Feds problems: Overestimating GDP growth and the related slow jobs recovery.  Looks like monetary polcy has run out of steam and fiscal policy has buried us in debt, now a staggering $17 Trillion and growing. Its time to let business solve the problem and not over-regulate them.

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Go here for full story: http://on.wsj.com/18kSEM5

Two reasons that Mr. Bernanke offered Wednesday for the Fed's surprising policy blink. The Fed chief cited the dangers of recent market "tightening" in the form of higher long-term interest rates, as well as the risks of fiscal "drag" from Congress.

Fed has persistently predicted that its policies would lift the economy to a faster pace of growth, only to be disappointed. In mid-2011, the "central tendency" prediction of its monetary officials was for GDP growth in 2013 of between 3.5% and 4.3%. Now that tendency for this year is 2% to 2.3%, and even that's optimistic considering the first half of the year was only 1.8%.

An intrepid reporter asked Mr. Bernanke on Wednesday to explain these mistaken forecasts, and the chairman conceded the point. But he countered that the Fed had actually underestimated the decline in unemployment, adding that in any event it now "appears" that the financial crisis has doomed the economy "at least temporarily" to a slower rate of potential growth. That isn't what the Fed has been saying the last five years.

The alternative explanation, which Mr. Bernanke won't concede, is that the Fed's monetary exertions haven't worked as planned. Near-zero interest rates and bond purchases helped the economy amid the 2008-2009 panic, but after nearly five years the undeniable reality is that they haven't delivered faster growth. Mr. Bernanke isn't about to concede policy failure. So his contradictory retort is essentially that these policies have worked, but because they haven't worked well enough they must be continued.

For Mr. Bernanke to blink even as he is heading out the Fed door shows how difficult it will be to return to monetary normalcy. If he begins tapering before he steps down, he might at least force his successor as chairman to think hard before changing course.

But if even Mr. Bernanke feels he can't stop, with all of his popularity on Wall Street and Washington, then imagine the pickle for the next Fed chairman. All the more so if President Obama's nominee is Ms. Yellen. She leads the Fed's dovish wing and at key decision points in the last five years has wanted to go even further in the easing direction than Mr. Bernanke. 

 

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