It Really Looks Like Bernanke Wants to Declare Victory and Exit Quantitative Easing Before His Term Ends...
Bullard doesn't seem to like this. And Mark Thoma sends us to Tim Duy who doesn't like this, and explains why:
Economist's View: Fed Watch: It's About The Calendar: St. Louis Federal Reserve President James Bullard explained his FOMC dissent in a press release this morning, and it was an eye-opener. I don't see how you can read Bullard's statement and not conclude that the primary consideration for scaling back asset purchases is the calendar. I think that the date, not the data, is more important than Fed officials like to claim.
Bullard first attacks the Fed's decision in light of falling inflation…. No surprise here: Bullard frequently voices concerns about the path of inflation and inflation expectations on both sides of the target…. Why would the Fed lay out a plan to withdraw accommodation - which in and of itself is a withdrawal of accommodation - at a meeting when forecasts were downgraded? Because, as a group, policymakers are no longer comfortable with asset purchases and want to draw the program to a close as soon as possible. And that means downplaying soft data and hanging policy on whatever good data comes in the door. In this case, that means the improvement in the unemployment rate forecast. Just for good measure, let's add on a new policy trigger, a 7% unemployment rate. In my opinion, it is not a coincidence that they picked a trigger variable where their forecasts have been most accurate or even too pessimistic. They loaded the dice in their favor.
Bullard then goes one step further…. Key words: "calendar objectives." Bullard clearly felt the mood in the room was something to the effect of "We know the data is soft, but we want out of this program by the middle of next year, so we are going to lay out a program to do just that."
In light of Bullard's dissent, the market's reaction should be perfectly clear. I have seen some twitter chatter to the effect of market participants didn't understand what Federal Reserve Chairman Ben Bernanke was saying, that his message was really dovish, that interest rates would be nailed to the zero bound in 2015, that the policy was data dependent, etc. Market participants obviously didn't have that interpretation.
Indeed, I think market participants clearly heard Bernanke. After weeks of being soothed by analysts saying that the data was key, that low inflation would stay the Fed's hand, Bernanke laid out clear as day a plan for ending quantitative easing by the middle of next year. Market participants then concluded exactly what Bullard concluded: It's the date, not the data.
With that information in hand, market participants did exactly what they should have been expected. I think Felix Salmon has it right:
What we really saw today was not a move out of stocks, or bonds, or gold, but rather a repricing within each asset class.
The Fed changed the game this week. Bernanke made clear the Fed wants out of quantitative easing. While everything is data dependent, the weight has shifted. The objective of ending quantitative now carries as much if not more weight than the data. Market participants need to adjust the prices of risk assets accordingly.
Bottom Line: I think the question is not how good the data needs to be to convince the Fed to taper. The question is how bad it needs to be to convince them not to taper. And I think it needs to be pretty bad.
I think that I do not like this either.
