Counterparties: A Fed divided
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The minutes from the December meeting of the Fedâs Open Market Committee came out today and managed to include everyoneâs least favorite word: âdividedâ.
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% — âseveralâ members of the committee wanted to end or slow the central bankâs asset purchasing program âwell beforeâ the end of the year. Joe Weisenthal calls todayâs news the âfirst real signal of an eventual return to normal policyâ.
James Hamilton has a great look at the Fedâs $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 âa littleâ and done no harm to inflation. (Bill Gross, in seemingly his millionth such warning, thinks this âinflation dragonâ 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, HSBCâs chief economist, Congress is now the biggest risk to the economy.
Justin Fox says fiscal showdowns wonât go away anytime soon — itâll 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 Fedâs asset purchases are intended to juice the ânear-term momentum of the economyâ. 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 todayâs 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