By Pivoting Away From Stimulus, Is The Federal Reserve Making the Same Mistake as Congress?

June 20th, 2013 at 11:55 pm

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.

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9 comments in reply to "By Pivoting Away From Stimulus, Is The Federal Reserve Making the Same Mistake as Congress?"

  1. Mark Jamison says:

    Could it be that markets are roiled and volatile because they no longer represent a perfect synthesis of available information but are instead casinos of arbitrage and advantage? Do stock markets really fulfill their traditional role of directing capital anymore or have they become something less useful? Do markets lead, follow, or simply chase?

  2. foosion says:

    For me, the perfect illustration of what’s wrong is summed up by the interchange between Bernanke and Ryan Avent of the economist at

    Avent says the Fed seems blase about inflation and inflation expectations, which are remarkably low and have fallen, raising real rates and suggesting the Fed should be pushing on the accelerator. Bernanke replies “I don’t disagree with anything you’ve said.” Yet they are talking about doing less, not doing more.

    Anyone remember what premature tightening did in the 1930s?

    Is Obama aware enough to appoint the right person as the next Fed chair and get them confirmed?

    • Potomac Oracle says:

      Obama will appoint Yellen, the female version of Bernanke -Greenspan.

      Bernanke could set his inflation target at 5%-6% and generate millions of jobs since the rich hoarding all that cash will see its value erode if not invested in more productive real assets. With real un-under employment at close to 21%, and under utilized capacity growing at the margins, hyperinflation in the medium term is highly unlikely.

      Simultaneously, Bernanke could support suspension of the payroll tax, putting $1.5 trillion in worker and business pockets over the next year.

  3. Not My Real Fake Name says:

    Bernanke wants to retire and the other members of the Fed told him he needs to clean up his mess before he goes. But seriously, he has been frustrated by a congress that has opposed his actions to help the economy at every turn. With everything from too small a stimulus, the debt ceiling fight, the sequester and now this immigration “reform” bill, which will let a population the size of Canada into an economy that cannot produce enough jobs for its own high school and college graduates.

    I think he said to himself, oh you think you have a “worker shortage”, I know how to fix that for you.

    If the immigration bill passes, and we have an environment where the 10-yar note is at 3%, we will have a decade of zero job growth and eventually riots in the streets like Brazil, and Turkey, and Syria.

    I think he wants congress to run for reelection on their record, not his, and he is giving them the economy that they wished for.

  4. Fred Donaldson says:

    Whenever the market crashes, someone makes money, and it’s in their interest that the bigger the crash, the better. Looking for good reasons for irrational despondence is not the same as looking under the rock to find where the real reasons are hidden.

    The crash in gold has led many to pull out of stocks and bonds in order to cover the precious metal losses, and increased margin requirements yesterday for gold and platinum means even more cash needed to cover.

    But we have no idea what the big investors may have decided among themselves, and if they sell together, there’s not much the average investor can do to offset the drops, except wrongly exiting the market, lowering prices more, until stocks are attractive to the big fish again at bargain prices.

  5. Rima Regas says:

    Bernanke must have given up on jobs ever coming back and just wants to make good with his fellow Republicans. It’s the only way I can make sense of this move, given his scholarly work and experience as an economist.

  6. JohnR says:

    I suspect that Ben is more like Willard at this point. One question would be, who is the Real Ben? Jamie Dimon apparently thought he might be.

  7. Kevin Rica says:

    This whole episode reminds me of when the Psychic Friends Network went bankrupt. I forgot which of the late-nite comics asked the logical question: Didn’t they see that coming?

    What a waste this whole New Classical phase was: rational expectations and efficient markets, including two Nobels squandered on Tom Sargent and Robert Lucas.

    What we see here is Ben B makes a much-anticipated announcement that sooner-or-later the inevitable will happen and the “can’t-be-fooled-markets” crowd blames Ben for surprising them and upsetting their delicate, neuresthenic constitutions.

    Can’t have it both ways.