Apart from the obviously (typical) nervous presentation by Chairman Bernanke today which emoted all the confidence of 13 year old giving junior high book report presentation, his policy prescription (Full Monty) and unchanged QE did not come close to matching the state of the economy that the Fed sees to date and sees in the future.
In light of high unemployment and low inflation (assumption) hanging around for 3 more years, we learned the Fed sees Fed funds at or near zero for an additional 18 months, something 11 of the 17 members of the FOMC concur on. Wow did that unleash a move in bonds, dollar and to some extent stocks. PIMCO’s Gross called it QE 2.5. Media reports harangued its significance. And surely the Fed’s shred of clothing it still clutched after its “communication easing” is also plain for all to see if you want to look…the Fed wants everyone to forget about selling bonds (keep market rates low…Bernanke said 2014 Fed funds forecast implies no asset sales until 2015 – suspect maturing stuff could not be reinvested so possible to see balance sheet shrink some before 2014 Fed funds hike), sell dollars and buy equities. So I guess Gross has a point.
But balance sheet expansion via asset purchases is more akin to a meal of roast whole pork while communication easing is like a Chinese meal…still hungry at the end of the meal. I just don’t think the markets will write 2014 on Fed funds on post-it notes to paste to workstations as a guide to trading markets for the next 3 years much less 6 weeks.
As far as my original gripe Bernanke described the economy and outlook in anything but hopeful, glass-half-filled terms. The transmission mechanism is impaired (aka liquidity trap continues) minimizing the impact of conventional monetary policy, unemployment is unacceptably high and likely to stay that way through the forecast period (2015), inflation is subdued and likely to remain that way through the forecast period, housing is still a major problem impacting confidence and demand, external headwinds are fierce thanks to the Euro Zone crisis, House of Representatives would like to screw up growth more with Hoover era fiscal tightening, excess capacity in labor and product markets are here to stay and “all you got Chairman Bernanke is ‘talk easy to me’?”
What the foohbah? Why is the Fed being so timid with its policy response – apologetic – when the economy is crap and staying that way ahead…with ever present risk it goes to 2009 lows in a hurry if Euro Zone mishandles its crisis in a serious way (not an insignificant risk)? Is Bernanke afraid of GOP blowback from being bolder? Will peer criticism from fresh water academic economists fatally pierce his thin skin? Or are the hawks on the FOMC so convincing and so up in arms about how the Fed is running printing presses and conducting fiscal policy by buying bonds that he can’t be bold without making a mockery of FOMC democracy and compromise?
It is insane to roll out a 2% inflation target in the current environment…it should be 6% because the overwhelming balance of risks are pointed in the direction of deflation using the Fed’s own assumptions. The Fed can do a lot to stoke inflation – it prints money…helicopter Ben right? Go Latam retro on this stinker of an economy if that is what you think in your heart of hearts. Stop being a wimp.
Frankly I think Bernanke did a disservice to the Fed today…the disconnect above is so blatant that one can only conclude its time Bernanke put down Diary of a Wimpy Kid and pick up a copy of Lord of the Rings.
David Gilmore
fxa@fxa.com
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