Counterparties: A Fed divided
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The minutes from the December meeting of the Fed’s Open Market Committee came out today and managed to include everyone’s least favorite word: “divided”.
At the same time that the Fed made the unprecedented move to tie monetary policy to specific unemployment targets — promising to keep rates low until unemployment fell below 6.5% — “several” members of the committee wanted to end or slow the central bank’s asset purchasing program “well before” the end of the year. Joe Weisenthal calls today’s news the “first real signal of an eventual return to normal policy”.
James Hamilton has a great look at the Fed’s $3 trillion balance sheet, through its various asset-buying programs since the crisis — QEs 1-3, if you will. The takeaway: the unprecedented programs may have helped employment “a little” and done no harm to inflation. (Bill Gross, in seemingly his millionth such warning, thinks this “inflation dragon” is flying our way right now).
By almost every account, the fiscal policy has been even more heterodox. The fiscal deal just passed by Congress goes against just about every major school of economic thought and does nothing for unemployment or the deficit. Cullen Roche says the deal will cut about 1.3% from 2013 GDP; Brad DeLong puts it at more like 1.75%. To Chris Dillow, this all means the basic post-war role of politicians in providing economic certainty is gone. To Kevin Logan, HSBC’s chief economist, Congress is now the biggest risk to the economy.
Justin Fox says fiscal showdowns won’t go away anytime soon — it’ll take a long while to wash the anti-government ranks out of the Republican Party. As for the Fed, Cardiff Garcia smartly warns us not to freak out: the Fed’s asset purchases are intended to juice the “near-term momentum of the economy”. If the economy sours again, the Fed could always just begin its largely unproven, possibly bubble-causing asset-purchasing program all over again. — Ben Walsh and Ryan McCarthy
On to today’s links:
What’s inside America’s banks? Not even the most sophisticated investor knows – Frank Partnoy and Jesse Eisinger
Basel III includes 78 calculus regulations, 509 pages and a whole lot of conflicting rules – Yalman Onaran
You can’t regulate with nostalgia – Felix