The ‘taper tantrum’ of May and June, as the mid-year spike in interest rates became known, appears to have humbled Federal Reserve officials into having a second look at their convictions about the power of forward guidance on interest rate policy.
By Alister Bull
Christina Romer, former chair of the White House Council of Economic Advisers and a strong advocate for Janet Yellen to take over from Ben Bernanke as the next chair of the Federal Reserve, slammed the Fed in a lecture last week that accused the U.S. central bank of being too meek and of fighting the wrong battle by being fixated on asset bubbles.
Richard Fisher, president of the Dallas Federal Reserve and one of the U.S. central bank’s arch inflation hawks, took us by surprise this week – he told Reuters that, given all the uncertainty generated by the government shutdown, it would not be prudent for the Fed to reduce its bond-buying stimulus this month.
You have to give Federal Reserve Chairman Ben Bernanke credit for standing his ground on data-dependence. Despite widespread suspicions, including on this blog, that the central bank would begin reducing the pace of its bond-buying stimulus in September simply because the markets were expecting it, the Fed chose to hold off in the face of a still-fragile economy.
Germany’s Ifo sentiment index is the big data release of the day and is forecast to continue its upward trajectory after the country’s PMI survey on Monday showed the private sector growing at its fastest rate since January.
It’s hard to shake the feeling that the Federal Reserve is about to begin pulling back on stimulus not just on the back of better economic data, but also because financial markets have already priced it in. The band-aid ripping debate over an eventual tapering of bond purchases that started in May was so painful, Fed officials simply don’t want to go through it again.