OK, clearly the markets aren’t listening to me—not exactly a surprise. But they’re not listening to Ben either, who’s been saying that the economy’s getting a bit better, so interest rates are going up. And at some point, sooner than later, he and his buds are going to start adding a bit less juice to the punch bowl. Surely, markets, (he’s saying) you didn’t think this easy money party was going to last forever? After all, central banks in healthy economies don’t have $3.4 trillion balance sheets and hold rates at zero.
Here’s a little sample of what’s on the wires re markets and Ben right now—if they were going out, they’d need couples’ therapy (“Markets, I think Ben is trying to tell you something…can you tell Ben why you’re having trouble hearing him?”).
Bernanke and Markets, Crazed and Confused
Bernanke Speaks, and Markets Tumble
Bernanke Sneezes, Global Markets Catch a Cold
So I don’t really know what to make of the markets and I suspect they’re just going to be volatile for a while. Like I said yesterday, it’s the real economy I’m worried about, and I used to have a friend in Ben when it came to that. Now, I’m not so sure.
Years ago, Congress and the administration pivoted too soon from the jobs deficit to the budget deficit. That left Bernanke along with Janet Yellen, his vice-chair, and others on the board (e.g., Charles Evans), as the only policy makers in this benighted town speaking out about the plight of the unemployed and explicitly criticizing the Congress for creating fiscal headwinds against their monetary tailwinds.
Now, though their statement from yesterday acknowledges ongoing weakness (“unemployment rate remains elevated”), they too are talking about pivoting, even though most forecasts, including the IMFs, are for slower growth this year than last year. True, the Fed’s own forecasts don’t predict that, but a) they’re only forecasting growth of between 2.3 and 2.6% (2012 was 2.2%), well below what’s needed to close ongoing output gaps, and b) they’ve been consistently optimistic and have had to mark down every one of their prior guesstimates.
Fed policy always has costs and benefits and deep monetary stimulus is no free lunch—just ask savers, fixed-income dependents, and anyone else who lives off of interest. And asset bubbles happen when risk is persistently underpriced. But as long as the broader economy remains in the residual gravitational pull of the great recession, the benefits of the Fed’s aggressive actions outweigh the costs.
I get that they’re planning their pivot, which isn’t the same as pivoting. But they’re doing so too soon.