By James Saft
(Reuters) – If the Federal Reserve does begin to taper its purchases of bonds in September there is really only one way to interpret the move: as a retreat.
Not a victory, because, as can be seen most clearly in last Friday’s U.S. July labor report, the employment market is not strong, not creating high-quality jobs, and wages are actually falling. If your dream is to flip burgers to pay off your education debt, this is your economy.
Certainly not a victory, because, despite the undoubted stimulus of low rates, the most important measure of core inflation is well below the Fed’s comfort zone and trending lower.
The strong arguments for starting to taper purchases of mortgage and government bonds are all about costs and risks. Bond buying works by distorting prices, blunting the already addled risk sensors of financial markets and leading to a sizable, and ultimately costly, misallocation of capital.
In its own sweetly indirect way, the Fed has been upfront about this, as can be seen in the statement released last week along with its decision to keep current monetary policy in place: