The Fed is locked into bad equilibrium where it is forced to change policy gradually, because that is what markets expect, which in turn means policy works better with gradual changes.
That is the possibility outgoing Fed governor Jeremy Stein has raised in a speech on Tuesday evening. Read more
When the Fed began its third round of quantitative easing last autumn, the most recent jobs report in hand was for August, which showed an unemployment rate of 8.1 per cent. Today the unemployment rate is 7.6 per cent. The Fed said it would keep buying assets, currently at a pace of $85bn-a-month, until there is a “substantial improvement” in the “outlook for the labour market”. The question is whether the current data meet that condition or at least bring it close enough that the Fed can start to taper its purchases.
The current FOMC meeting, which starts today and concludes tomorrow without a Ben Bernanke press conference, is unlikely to produce much news. Steady movement towards a taper of the $85bn, QE3 programme of asset purchases has been checked by a run of bad economic data since March.
I get no sense that much has changed in the thinking of most FOMC officials. There is still a fair bit of confidence that the underlying state of the economy has improved (see, for example, the comments of Boston Fed president Eric Rosengren). The main effect of weak payrolls and the sequester is to increase uncertainty about the trajectory of the economy. That encourages the status quo – and open-ended QE means the default is continued purchases. Read more
I’ve written here before that one possibility under discussion at the Fed is tapering off its $600bn QE2 asset purchases in order to minimise market disruption when they end.
Today, president James Bullard of the St Louis Fed raised the option of tapering so total purchases when the programme stops at the end of June are less than $600bn.
“The natural debate now is whether to complete the program or to taper off to a somewhat lower level of assets”
Mr Bullard told reporters after an interesting speech that he would favour a small reduction in the programme at the next meeting in March to reflect the better economic outlook.
Several market commentators have also put forward a slightly different version of a taper: Read more