Counterparties: Aggressive Doves
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For the first time, the Fed has explicitly tied its interest rate policy to specific levels of unemployment and inflation. Short-term rates will stay at essentially zero as long as unemployment is above 6.5% and inflation is under 2.5%, the Fed announced today. WaPoâ€™s Neil Irwin says Fed policymakers â€śunveiled a huge surpriseâ€ť.
If youâ€™ve been following Chicago Fed president Charles Evans, this policy — a version of which is known as the â€śEvans Ruleâ€ť — is familiar. The surprise is that Bernanke delivered almost exactly what Evans advocated: monetary policy that is tied to economic conditions, rather than the Gregorian calendar. Jon Hilsenrath and Brian Blackstone point out that the move comes in the context of increasingly coordinated and unprecedented actions by central bankers around the world; this is certainly the latter, if not the former.
Why the historic shift? Because the economy isnâ€™t growing fast enough, and because unemployment is still too high. As Reutersâ€™ Pedro da Costa and Alister Bull note, the Fed cut its growth expectations for next year, and business investment remains weak. Look at Tim Duyâ€™s bleak picture of the American consumer and you can see why the concern is justified. Rates have been at zero since December 2008, which means that one of the few remaining tools the Fed has is setting expectations.
Mark Thoma points out that after decades of rhetoric aimed at controlling inflation by raising rates, the Fed â€śhas too much credibility on inflationâ€ť (and, presumably, not enough on unemployment). Pedro da Costa reports that Jan Hatzius, Goldman Sachsâ€™ chief economist, thinks the Fedâ€™s target is â€śproblematic…because the unemployment rate… is an imperfect measure of progress.â€ť Bernankeâ€™s insistence in his press conference that 6.5% unemployment is a guidepost, â€śnot a targetâ€ť indicates that he knows the headline unemployment rate doesnâ€™t always tell the full story.
Itâ€™s not just Bernanke whose approach has changed. The members of the Fedâ€™s Open Market Committee have been shifting all year. As today’s news demonstrates, the Fed is now â€śaggressively dovishâ€ť. — Ben Walsh
On to todayâ€™s links:
The SEC was politely chiding JPMorgan about disclosures months before the Whale trade blew up – Bloomberg
The SEC demanded that JP Morgan provide more disclosure about Goldman Sachsâ€™s prop trading – Matt Levine