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From Mini-Taper to FOMC Exit: Janet in Neverland

Written by Gary North on September 16, 2013

The media is Twitterpated over the thought of a mini-taper from $85 billion a month ($1 trillion/year) in counterfeit money to a mere $75 billion ($900 billion/year).

Why is this tapering expected? Not because hiring is robust. Not because pay is rising. Not because consumers are spending more. Not because economic growth is accelerating. None of these is happening.

For months, the Fed has said it will slow its $85 billion-a-month in Treasury and mortgage bond purchases once the outlook for the job market has improved substantially. Those purchases have been designed to keep long-term loan rates low to get people to borrow and spend and invest in the stock market.

From the day QE3 began, the boilerplate press releases of the Federal Open Market Committee (FOMC) have been specific about the numbers: 6.5% unemployment or 2.5% increase in consumer prices. In short, the FOMC has said that there will be no taper this week.

The media refuse to believe. They make up fantasy stories about what the FOMC has said — the opposite of present conditions.

Are these stories based on inside information? Is the FOMC about to betray everyone who believed its boilerplate press releases? That is exactly what the media imply, but refuse to say.

Super-low rates are credited with helping fuel a housing comeback, support economic growth, drive stocks to record highs and restore the wealth of many Americans.

Really? And the FOMC is about the pull the plug?

Few think the Fed will significantly reduce its bond purchases — not now, anyway. Many economists think the Fed will announce when its two-day policy meeting ends Wednesday that it will slow its purchases by $10 billion — to $75 billion a month.

Then why taper? Why stop doing what the press releases have said the FOMC would not stop doing?

In part, some Fed officials don’t think the bond purchases are doing much good anymore. And they feel that by continuing to flood the financial system with cash, the Fed might be raising the risks of high inflation or dangerous bubbles in assets like stocks or real estate. Just the mention of a slowdown in bond purchases spooked investors. Some fear that the Fed’s ultra-low-rate policies distorted the prices of some assets.

Which FED officials think this? These fears are rational. They in fact reveal an understanding of Austrian School economics. That is why, so far, the FOMC has ignored these arguments. Yet we are asked to believe that the FOMC is coming to its senses by $10 billion a month.

First, in June, Bernanke never mentioned September. He said “before the end of the year.” Second, he mentioned unemployment at 7%. It is 7.3%. I covered his statement at the time. You can read it here.

The author adds this:

In addition, the Fed eventually needs to sell its vast investment portfolio, which is on track to top $4 trillion next year, without upsetting markets. The more the Fed expands its portfolio, the harder and more perilous the eventual sell-off could be.

Wow! The long-promised, never explained exit strategy. Bernanke has never explained how this will be done. It has all been deliberately vague, as his February 2010 testimony indicated.

And because the Fed has been raising expectations that its pullback will start as soon as September, some Fed officials may worry that defying those expectations would rattle investors.

I have yet to see any signed document by any Federal Reserve official pointing to September as the date of the taper, let alone any such expectation by “the Fed.” This rumor has been fueled for months by the media, based on nothing but rumors.

Finally, there’s Bernanke’s expected departure in January. If the Fed is going to slow its stimulus, officials may not want to wait until their last meeting of the year in December, just before a new chairman takes over. That’s, in part, why some think a pullback in bond purchases will be announced Wednesday.

For these arguments, the author offers not one citation. It begins, “If the Fed is going to slow its stimulus. . . .” If? Why if? What is the evidence for this if? “Some?” Who, exactly? Writers of media reports, all of whom quote nobody specific inside the FED. Instead, they quote professors or employees of brokerage firms.

“Bernanke may well want to have a bond-reduction program in place before a new chairman comes in,” said David Wyss, a former chief economist at Standard & Poor’s and now an economics professor at Brown University.

What Bernanke “may well want” is a matter of pure conjecture. In any case, he has only one vote on the FOMC. There is no hint of any such views in the published minutes.

So, the media are either making this up, or they are recipients of inside information. In short, either they are faking it (likely) or else members of the FOMC are breaking the law (unlikely).

All that said, it’s possible the Fed will choose not to slow its bond purchases now. In recent public remarks, some Fed officials have sounded uncertain that the economy and the job market have improved enough.

Then why write the article?

Analysts expect the Fed to downgrade its economic outlook for 2013 from its previous forecast in June. That forecast estimated that the economy would grow at a still-sluggish annual rate between 2.3 percent and 2.8 percent this year. Through the first six months of 2013, the economy has grown at a much slower 1.8 percent rate.

I see. The FED thinks the economy is sagging, so it will cut back on QE3, which was adopted last December to stimulate the economy.

It all makes perfect sense . . . to media reporters.

The unemployment rate is now 7.3 percent, the lowest since 2008. Yet the rate has dropped in large part because many people have stopped looking for work and are no longer counted as unemployed — not because hiring has accelerated. Inflation is running below the Fed’s 2 percent target.

Quite true. So why will the FOMC pull back?

The Fed has struggled at times to send a clear message about its likely timetable for changing policies. Yet in recent months, the Fed and Bernanke have been explicit that a pullback in bond purchases would likely start by year’s end and perhaps by September.

When has Bernanke mentioned September?

“This is the market’s consensus view, and Fed officials are the ones who have guided the market to that consensus,” said Mark Zandi, chief economist at Moody’s Analytics. “At this point, the Fed doesn’t want to jumble its communications.”

So far, the media have jumbled the FOMC’s explicit statements. They have invented the September taper.

Will a taper change anything? No.

Even by that timetable, the Fed’s stock of Treasury and mortgage bonds will grow: The investment portfolio will likely near $4.5 trillion by next summer. It’s now a record $3.66 trillion — a four-fold increase from its level when the financial crisis erupted five years ago.

Even after new bond buying winds down, the Fed plans to keep reinvesting its bond holdings. It just won’t be adding to its stockpile. It will still be providing extraordinary support for the economy.

But this is not enough for some Keynesians.

And yet some economists remain unconvinced that now is the time to slow the purchases.

“Interest rates have already gone up as a result of their just talking about bond reductions,” said Sung Won Sohn, an economics professor at California State University’s Martin Smith School of Business. “If they actually began cutting bond purchases, that would push interest rates up more and damage the economy.”

Does anyone seriously expect to see an exit strategy, where the FOMC shrinks the monetary base to $800 billion, where it was in August 2007? I don’t think so.

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One thought on “From Mini-Taper to FOMC Exit: Janet in Neverland

  1. Albert Maslar says:

    Ron Paul is perhaps the only Washington politician honest enough to campaign against the FED, but he never got the traction. Congress can do something but that something is always too big, too complicated, too difficult if not impossible to implement. Eventually, perhaps sooner than it looks like the ink on the funny money will smear and become non-negotiable.