Fed of many minds on tapering of bond buys
The world waited for the Federal Reserve's announcement last week on its intentions with the possible tapering of quantitative easing.
Most pundits expected an initial tapering of some $15 billion to $20 billion from the Fed's $85 billion-a-month underwriting of the American economy and Treasury bond and mortgage markets. As I wrote previously, however, the Fed is in a fix and likely would do nothing.
They did nothing. For the rest of the day Wednesday, the markets responded positively with the Standard & Poor's 500 setting a record high and gold and silver prices surging. By Thursday, however, the S&P dropped back and new concerns arose over the weakening of the dollar.
So was the Fed decision a measure of a sick economy? Or could it have been internal disagreement that forced the newly politicized Fed to resist pressures and expectations to start tapering?
In his announcement, Fed Chairman Ben Bernanke seemed to lean toward a weak economy. He alluded surprisingly to the fact that the “real” rate of unemployment was above the 7.3 percent official rate. “Joblessness is above acceptable levels,” he said. If the entire 11 million Americans who are unemployed are counted, the “real” rate is actually an unmentionable 13.7 percent.
Bernanke also expressed concern over falling participation rates, partly caused by an aging population. Workers working to an older age create upward pressure on youth unemployment. This portends serious political problems ahead as Baby Boomers — the largest generation — get older.
Although he indicated gross domestic product growth was disappointing, he named it as just one of three key measures alongside unemployment below 6.5 percent and inflation at below 2.0 percent. Then proceeded to cloud these targets by adding smoke: “There is no fixed data or calendar. ... But (tapering) could begin by late 2014.”
As he continued, it became more apparent that the Fed has no clear plan. Possibly there was internal disagreement as the Fed transitions from crisis management to economic management.
It is increasingly clear that the recovery and highly charged markets rely crucially on quantitative easing. Indeed, they are likely unable to handle the reality of America's economic and financial position without experiencing a collapse.
During questions, Bernanke mentioned the great power of the Fed. He was right. It may seem remarkable to some that the Fed has a monopoly on the creation and pricing of the World's Reserve Currency. It may appear scandalous that the Fed — a private company with $3.4 trillion in assets that is subject neither to taxation nor audit — should hold such enormous, unaccountable power.
More worrisome, the “independent” Fed has become politicized. Soon President Obama will appoint some seven replacements for retiring Federal Reserve Open Market Committee members. Potentially, the Fed could become party politicized. Perhaps this is what led Bernanke to uncharacteristically emphasize how the Fed was nonpolitical.
Another key reason Bernanke did not begin tapering could be that he did not want to pre-set a policy for his successor. Only time will tell if it was that, internal disagreement, a pessimistic view of the economy or all of the above.
John Browne, a former member of Britain's Parliament, is an economics columnist for Trib Total Media. Contact him at email@example.com.