Summary: We have now had a 24 hour avalanche of analysis about the Fed’s decision not to taper. Most technically accurate, as economic news often is. But myopic, as news coverage usually is. Today’s post gives a wider perspective on this decision, putting it in the content of the Great Recession and the following slow recovery. This gives a different set of answers.
This is a follow-up to yesterday’s post, Government economic stimulus is powerful medicine. Just as heroin was once used as a powerful medicine.
“I have absolutely no doubt that when the time comes for us to reduce the size of the balance sheet that we will find that a whole lot easier than we did when expanding it.”
— Meryvn King (Governor of the Bank of England), press conference on 15 February 2012
“Never underestimate the Fed’s dovishness“, Gavyn Davies , Financial Times, 18 September 2013
- Why did they not taper?
- When did monetary stimulus become super?
- When will they start the taper?
- For More Information
(1) Why did they not taper?
- Minor Answer #1: Because they feared that today the economy was too weak, and believe that the strength in Q3 and Q4 will allow a slow start to tapering.
- Minor Answer #2: Because they were afraid that the coming DC budget follies would slow the economy, and wanted to delay the taper’s impact until that act was concluded.
Real Answer #1: Because America is dysfunctional
Because the GOP opposed using fiscal policy, borrowing at generational-low rates to put unemployed people to work rebuilding America’s decaying infrastructure.Because Obama was too weak and short-sighted to fight for large-scale use of fiscal policy. His acquiescence to the GOP on this destroyed the great potential of his Administration, elected (like FDR) at a potentially pivotal moment in history.
Real answer #2: Because economists (like climate scientists) have become political activists
Since monetary policy was the only game available, they talked it up as the next best thing to Jesus return. In fact it probably has had little effect on the real world, but appears to have set off an asset price bubble (our third in the past 15 years, a record of incompetence).
Real answer #3: Because their policies assumed we would have a strong recovery by 2013, not the below-stall speed growth we got
The Fed staff publishes their forecasts, the basis on which the Open Market Committee takes action. The recovery has proven far less vibrant then they planned. By 2013 the economy they expected a boom, with GDP growth the fastest since 2000. Now they expect a strong second half to bring GDP up to 2.0% – 2.3% (slightly above the 2% stall speed). Does this graph build your confidence?