Testing a tantalizing taper timetable
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The Federal Reserve’s policymaking committee made no change in the central bank’s easy money stance at its most recent meeting, and will continue its $85 billion a month bond-purchasing program in the face of persistently high unemployment. But chairman Ben Bernanke, talking to reporters after the FOMC meeting, said that if the economy unfolds as hoped, the Fed could “moderate the monthly pace of purchases later this year”.
While the timeline for QE3 is still technically open-ended, Binyamin Appelbaum writes that for the first time Bernanke “specified an economic objective for the bond-buying”. The objective: 7% unemployment, a half-point drop from the current 7.6% level. If unemployment falls as the the Fed predicts, “tapering” could begin at the end of this year and the Fed might end QE altogether by mid-2014.
Whether the US economy will actually follow that path is unclear. Not only did the Fed emphasize that government spending is “restraining economic growth”, it’s just not that good at projecting economic performance. The WSJ points out that “in every year of the economic recovery, the Fed has overestimated how fast the economy would grow”. Dylan Matthews demonstrates this graphically.
The Fed’s statements were broadly dovish, and came with two dissents. One was from Esther George, who is afraid of too much inflation; the other came from James Bullard, who wants more forceful pursuit of the committee’s inflation goal, which is currently significantly higher than the rate at which prices are actually rising in America. Agnes Crane points out that it’s been 20 years since the last time a Fed decision was accompanied by both a hawkish and dovish dissent.
Bond traders reacted negatively to today’s announcement: 10-year Treasury yields rose to 2.36%, a level not seen since March 2012 and up a whopping 17 basis points in 24 hours. (The equity market was initially a bit more bi-polar about the whole thing, but ended down as well.) Falling bond prices and a volatile stock market are best explained, says Steve Rattner, by the notion that the “market hates uncertainty and Bernanke is providing a boatload of it”. — Ben Walsh
On to today’s links:
Watch Jon Hilsenrath destroy Rick Santelli – CNBC
The simple case for some moderate, sensible inflation – Eduardo Porter
Markets have already misread the Fed – Justin Wolfers
El-Erian: After Bernanke – FP
And, of course, there are many more links at Counterparties.