The word “taper” has crossed the lips of Fed officials far too often leading to expectations of somewhat less than the new economic normal of somewhere between horrid and awful. It really is a shame to set the common denominator so low that failure in impossible and we seem to simply accept it. As my mom used to say, “Blessed are they who expect nothing because they’ll never be disappointed.”
A picture is worth a thousand words, but which thousand words all depends on the viewer. Take this graph, for example (I really like this one):
It is obvious that something is wrong. And if you ask, say, Plosser, what he thinks about the picture it paints, he’d likely say that QE3 isn’t really working, it’s dangerous territory for the Fed to have such a large balance sheet and it should stop.
I’d be likely to agree with at least some of it. I agree that QE isn’t working as well as it could. But there’s something missing in the public conversation about the QE program, like perhaps what else can be done to either replace it or make it more effective. Indeed, it would be irresponsible, or worse, illegal to just stop while doing nothing else to solve the monetary portion of the problem. We’re not hearing about alternatives, only the imminence of the Fed slamming on the brakes followed by incoherent blabber about being misunderstood.
I think in psychology it’s called something like repeated “negative reinforcement”. People hear the words “taper” or “better than expected jobs report” and some unnamed fear sets in – kind of like a child who is a picky eater and has been strongly and repeatedly admonished for it experiencing anxiety attacks from hearing the call to dinner. What is a generally happy time for most kids inspires uncertainty or even terror.
There seems to be a serious lack of discipline on the FOMC in setting a goal and sticking to it. With each and every statement that is released, the message that most of the members are fearful at best or incompetent is loud and clear. Additionally, the continuous stream of erroneous economic forecasts that have been released with the FOMC statements over the last several years does not help inspire confidence that they have anything under control. The FOMC members say a lot of things, but none of it really means anything. I think we are lucky to have had as much cautious optimism in the markets as we have had.
In my opinion we’ve had plenty of time for experimentation with little tweaks around the edges of a monetary policy regime that is obsolete. It doesn’t matter how much they try to redesign the buggy whip, it just isn’t useful anymore; and the same is true for an explicit inflation targeting regime that features a rate peg while in a ZLB world – it just isn’t useful anymore. Trying to wing it merely confuses everyone, even FOMC members in a way that certainly can’t be hidden which, at least to me, seems like it’s a primary source of uncertainty and caution. After all, the Fed allowed deflation once having their collective heads screwed on backward; and it would be much better to send a message that the right lessons were learned from those mistakes and it won’t happen again. But of course to make that part as clear as bell, they have to come to terms with what happened. The mistakes seems like a collective market awareness that may or may not actually be in consciousness of the individual players. But the unnamed fear is front and center, still.