Counterparties: Aggressive Doves

December 12, 2012

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to

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. WaPo’s Neil Irwin says Fed policymakers “unveiled a huge surprise”.

If you’ve been following Chicago Fed president Charles Evans, this policy — a version of which is known as the “Evans Rule” — 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 isn’t growing fast enough, and because unemployment is still too high. As Reuters’ Pedro da Costa and Alister Bull note, the Fed cut its growth expectations for next year, and business investment remains weak. Look at Tim Duy’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 “has too much credibility on inflation” (and, presumably, not enough on unemployment). Pedro da Costa reports that Jan Hatzius, Goldman Sachs’ chief economist, thinks the Fed’s target is “problematic…because the unemployment rate… is an imperfect measure of progress.” Bernanke’s insistence in his press conference that 6.5% unemployment is a guidepost, “not a target” indicates that he knows the headline unemployment rate doesn’t always tell the full story.

It’s not just Bernanke whose approach has changed. The members of the Fed’s Open Market Committee have been shifting all year. As today’s news demonstrates, the Fed is now “aggressively dovish”. — Ben Walsh

On to today’s links:

It’s now pretty damn clear that businesses are freaking out about the fiscal cliff – WaPo
Think of the children…and increase government spending – Christian Science Monitor

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 Sachs’s prop trading – Matt Levine

Actually, the White House is serious about another round of economic stimulus – Sam Stein and Ryan Grim

The booming American industry where the gap between CEO and worker pay has doubled in just 10 years – Bloomberg

Jamie Dimon will defend your freedom on the beach of the Bay of Pigs if he has too – Huffington Post
China’s fail safe plan to achieve social stability by not wearing ties – Quartz

Drivers like mass transit once they give it a try – Atlantic Cities

Tax Arcana
Breaking: the US Treasury does not have to pay taxes – John Carney

“As GZA was sitting beside me…”: RZA reviews “Django Unchained” – Huffington Post

Mark Carney is talking about NGDP targeting again – FT Alpaville
“The Shrinkage Factor” and how to make a prediction – Farnam Street

Big Brother
Police use the hum of an electrical outlet to timestamp crimes – BBC


Comments are closed.