I’m in Vermont and dealing with some health problems with the in-laws, so been a bit tough to fit posts in. I’ve got a backlog of more in-depth analysis (tech and macro) teed up in my mind, but need to be in front of a full-size screen with a real keyboard and something-better-than-Verizon-LTE Internet access. But some (hopefully not too ragged) thoughts on the Fed that have percolated over the past few days.
So the Fed didn’t taper. I think the Fed’s main message is Exactly what part of “data-dependent decision-making” didn’t you understand? Per my post last week, people will mostly just shift taper expectations to December (or shortly thereafter) so not much has really changed. But there is/was obviously a lot else mixed in.
- They are shit-scared of deflation (and well they should be): The inflation data is scary low and we are pretty darn close to a Japan scenario. The Fed is in a tough spot here. They don’t want to shout fire in a crowded theater (we are on the verge of disaster!). They also (still) haven’t fully accepted that they need to be inflation cheerleaders at this point in time. Under 2% is just plain scary from any rational perspective – even if anything but inflationista-ism is frowned on at the annual central banker’s ball.
- They are annoyed at Congress: The Fed’s calls for more rational fiscal policy have become increasingly pointed, plaintive and pathetic. Sending a message that “things are improving” a few weeks before Congress seems willing to risk national default probably didn’t seem wise.
- Short-circuits the easy trade. The Fed has been too obliging of the market’s desire for a “clean” trade. Its a whole lot easier (and safer) to forecast the path of the Fed than to forecast the economy. The move forces the markets’ focus back onto the actual economic data (instead of an unhealthy focus on the Fed’s internal politics). It also probably did some good in terms of clearing out uber-speculative trades.
- A communications experiment (on Bernanke’s part) gone awry and put right: Per Bullard’s comments in July, Bernanke’s press conference “tapering” commentary was at least partly designed to set Fed policy on auto-pilot before his December departure. Or more charitably, it was Bernanke taking that change in tone out for a test drive as a favor to his successor. One way or the other, this could have partly been the Fed committee reining in their lame-duck Chairman.
- They steepened the yield curve: I think the Fed has been looking for a steeper yield curve. Or at least a curve that moves up and down occasionally. That should drive bank lending (higher spreads) and get animal spirits moving again (the prospect of higher rates ahead does wonders to concentrate the minds of prospective corporate lenders). If the ten-year yield falls a bit but the curve stays steeper, the Fed could end up happy.
- The Fed is admitting they are human. This is a welcome evolution from the “maestro” Wizard-of-Oz antics of the Greenspan era. The Fed follows the economy more than they drive it. It’s always been odd to see supposed “free-marketeers” accord so much weight to the actions of a single central planner like the Fed. See “easy trade” above.
With the markets re-focusing on the upcoming government shut-down, this whole issue will probably be forgotten for a while, which the Fed has to be grateful for. When attention returns, lets all pray that inflation is trending toward or over 2% and hasn’t trended further down. Otherwise it is domo arigato Mr. Roboto.