Economics, U.S. Economy

SURPRISE!! Fed not to taper…

Image Credit: shutterstock

Image Credit: shutterstock

After almost 4 months of chatter about “tapering”–less QE from the Fed–that was launched by Chairman Bernanke’s May 22 musings about an improving US economy before the Joint Economic Committee and which drove up interest rates by well over a full percent, the Bernanke-Yellen -led Fed decided on September 18 NOT to taper. To put the same thing another way, after managing to introduce the additional drag of sharply higher interest rates and attendant signs of a housing relapse, by talking, prematurely as it turns out, about tapering, the Fed cited a “tightening of financial conditions” (that it had caused) as a reason not to taper. The FOMC, it turns out, needs to see “more evidence that progress (on the economy) will be sustained before adjusting the pace of purchases.”

So much for helpful “forward guidance” from the Fed. In case the always-optimistic Fed economic forecasters haven’t noticed, there was never a reason to talk about tapering in view of an economic pick up. During the first half of 2013, the US growth rate averaged a 1.8% pace, the unemployment rate dropped modestly, but only because more people are dropping out of the labor force. Beyond that, inflation-the Fed Hawks’ favorite boogeyman– has slipped down to a 1.2% pace, well below the Fed’s 2% target.

Fiscal drag in 2013  worth about 2 percentage points of gdp was bad enough, but when the drag from “taper-tantrum-driven” higher interest rates is added , we end up looking at an estimated 1% growth rate during 2H’13. Contrast that to the rosy Fed forecast for 2.0- 2.3% 2013 growth–down from an even rosier 2.3 – 2.6 range in June. To reach a 2.2% 2013 growth rate given the 1.8% first half pace and a 1.4% outlook for the current quarter, fourth quarter 2013 growth will need to come in at a 5% pace.

Surprise! That’s not going to happen. And Surprise! QE 4 is still a possibility…

2 thoughts on “SURPRISE!! Fed not to taper…

  1. Recovery, Recovery! Wherefore art thou, Recovery?

    Apparently, nowhere to be found. Hence more “stimulus.”

    A little government tinkering here; a little government experimenting there. Oh, why don’t we all just go home and let the government run the economy?

  2. Why does AEI, in theory a conservative bastion, endorse permanent inflation of 2% a year? That erodes today’s dollar by roughly half in a each generation. It is an economic policy which assumes that the average man is too stupid to realize that his savings are being stolen and his income cut by the stealth tax of inflation. And when combined with a policy of zero interest rate drives more sophisticated investors to take untoward risks in the struggle to achieve decent returns.

    If this be policy, give me chaos, or at least a coherent explanation of why such a program is better than a stable currency.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>