The Federal Reserve refrained on Wednesday from reducing its experimental bond purchase program, thus maintaining its unconventional support for markets and the economy. In doing so it is probably signalling more than continuing worries about America’s tepid recovery, high unemployment rate and the risk of another round of self-manufacturing problems courtesy of Congress. It may also be signalling its concern about triggering renewed financial volatility that would undermine growth, job creation and global financial stability – worries that are unlikely to dissipate easily given the different reaction functions of the economy and markets.
Starting in the last few months of 2008, the Fed successfully normalised markets whose functioning was severely stressed by the global financial crisis. It pivoted in 2010 to the more ambitious goal of using unconventional monetary policies to deliver better economic outcomes; and did so with little policy support from other government agencies with better tools, but constrained by political polarisation. Continue reading »