If anybody had the call correct it was Scott Sumner, but, in my opinion, not necessarily in the way he describes it. I am only guessing, and I think that the decision to taper had not much at all to do with the condition of the labor market or the economy in general, but rather the budget deal that relaxes austerity – if fiscal does more, the Fed does less. There was no change in the Evans rule, we have had only two successive slightly better than recent average employment reports and inflation is still ticking down. The LFPR is still very bad, NGDP growth is slowing, and GDP estimates are still too tepid to be called a recovery. If we’re not going to do NGDPLT, the taper is premature at best considering that the inclusion of headline inflation in the target is still “cheating” and still dangerous. In other words, the target is still meaningless.
This doesn’t mean that I agree that QE is the right thing to do. It has never been the right thing to do. QE is a way to bridge a gap created between the intent of the policy regime and the actual results – a way of doing the best one can with various parts and pieces of a high level policy framework that together do not function consistent with stated intention and do not deliver robust crisis avoidance and mitigation. And rather than admit that the policy framework is catastrophically flawed, not worthy of the economy for which it was intended, and in order to preserve central bank discretion, we have this policy monstrosity foisted upon us from on high that is stitched together with bubblegum and bailing wire. Money is still inappropriately tight and there is seemingly no light at the end of the tunnel while the outgoing Fed Chairman flaps his gums about financial stability – the irony is striking. Bernanke is leaving without cleaning up his mess even though intellectually capable. It is nearly the saddest thing I have ever seen, second only to the creation of the mess in the first place.