Wednesday, June 19, 2013
HOW'S THAT AGAIN?
The fed met for the last two days and the Chairman showed up precisely on time to explain what was going on. It sounded something like this.
"Thank you. We have met for the past couple of days and have reached the conclusion that things have continued to improve although not at the pace we would like to see but we feel better as to where we are and we may feel better at the end of the year but we are not sure we will. In the mean time to insure that we can feel better at the end of the year we are going to keep continuing what we have been doing for five years in regard to interest rates and for over a year in flooding the world with money along with out new ally, Japan, unless and until the unemployment rate reaches 7% at which point we may cut back on purchases but not change interest levels because that is still going to take an unemployment rte of 6.5% which if all of that happens without any interference, we might be out of the woods by 2015--then again we might not. I'll be happy to take questions."
"Mr. Chairman, Charles James here. Could you explain what it is you just said?"
"NO."
"Mr. Chairman, can we derive from your remarks that you a planning to taper?"
"You can...or you can't. Your call."
"Mr Chairman, many believe that President Obama in effect fired you in an interview earlier this week. Might one conclude that this end of year timing coincides with your...ah...retirement and you have clearly decided that this takes you off the hook?"
"One might conclude that; I certainly would not, but one might...indeed YOU might, but not I."
As this was going on the markets concluded that the Fed would declare victory and begin the tapering process with the stock market closing down over 200 points. Of greater note, the ten year yield shot up to 2.31%, an incredible 80bp move in slightly over a month, and yet Bill Gates says he was a buyer earlier in the day with a prediction of an end-year 1.90% yield. I'd keep the kids off the street for a while. This neighborhood is getting scary.
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You clearly haven't yet read Drunk Bernanke
ReplyDeletehttp://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/19/return-of-drunk-bernanke-what-the-fed-chairman-might-want-to-say-but-probably-wont/?wprss=rss_business
Question: So, when are you going to taper the pace of Federal Reserve bond purchases, currently $85 billion a month?
Bernanke: Sigh. Okay. I know that whatever I say to this, markets are going to hyperventilate and swing based on every pause and comma and adjective. It’s kind of exasperating, but I guess that’s the world we live in now. So I’ll just put it all on the table.
You guys are focused on the wrong thing! You want to interpret us going from $85 billion a month to, say, $70 billion a month in September versus December versus next year as conveying a ton of information about how loose or tight monetary policy is going to be years into the future. It’s not so. It’s more a judgment based on factors like whether we’re convinced the economy is gaining momentum, whether we expect inflation to rise to our target or decline farther, and how worried we are about the impact our purchases have for the functioning of the bond markets.
So, we could taper sooner but still continue QE for longer, and the total scale of purchases could continue for longer. We’ll let the data be our guide. You should, too.
And don’t get me started about people using the taper talk to suggest that we’re going to raise short-term interest rates sooner rather than later. We just told you in December, and at every meeting since then, that we won’t hike rates until unemployment gets down to 6.5 percent or inflation is set to go over 2.5 percent. So, it’s fine if you want to change your assessment of when that might be based on incoming economic data. But if you’re changing that assessment based on something Jim Bullard or Eric Rosengren said about what we’ll do in the next few meetings, you’re doing it wrong.
Seriously, though, when are you going to taper?
[Smacks head]
When the time is right.
And when do you expect that to be?
Eh, the next few meetings. Maybe September. Maybe December. Maybe early next year. We’ll see.
[much more drunken candor on the article link]