The good news for the markets was that the Federal Reserve did the predictable thing by not announcing any tapering of its massive $85-billion-a-month monetary stimulus. The bad news was the policy statement left most Fed watchers divided over when the wind-down will actually take place.
Some experts read the statement as ‘doveish’ (more inclined to let monetary stimulus continue for a while), while others interpreted a more ‘hawkish’ stance on the part of the Fed. For instance, Marketwatch.com was among those that believed the Fed’s stance was ‘doveish’, noting that the Fed had indicated the economy was too weak to accept any pull-back of monetary stimulus.
Other Fed watchers came to the opposite conclusion. Businessinsider.com thought the Fed had taken a more ‘hawkish’ stance, and said given the Fed saw diminishing downside risks to the economic outlook and labour market, it seemed more prepared than before to implement a withdrawal of stimulus soon. A Bloomberg report on Financialpost.com noted that minutes of the September meeting also suggested that most policy makers were in favour of reducing the pace of bond purchases this year.
In the end, timing a monetary withdrawal schedule could depend mainly on a sustained recovery in the job market.
While the US economy may be recovering on the output (GDP) front, it has practically stagnated on the job front (the joblessness rate is still a high 7.2 percent). In other words, the recovery (fragile as it may be) has been jobless. That’s not good news for US policy makers. According to Fault Lines, a book by Raghuram G Rajan, a jobless recovery was the reason why asset prices, despite rising steadily between 2001 and 2003, never attracted higher interest rates. Rates were slashed to around 1 percent over the two years after the 9/11 attack, and were not raised well until 2004, when most observers believed the housing bubble had well and truly formed.
Rajan says that while the Fed kept making warning noises over the property bubble, it refrained from taking monetary action (raising interest rates) for fear of harming the prospects for jobs, whose growth was similarly stagnant back then.
Current Fed chairman may be caught in a similar bind. He might hesitate to take any action that harms the prospects of an economy whose recovery is still fragile. A tightening of policy stimulus could, in theory, reduce risk appetite among investors and businesses, curbing their appetite to spend and thereby create jobs. Monetary action would have to be carefully calibrated to avoid such an outcome.
The next meeting of the Federal Reserve takes place on December 17-18. It will be the last press conference of Ben Bernanke as his term expires soon after.
It’s tempting to say that the man who started the controversial Quantitative Easing policy to rescue the US economy from the Great Depression 2.0 will end his term by ensuring he lays the ground for dismantling the policy. However, that remains far from certain given the ever-shifting economic conditions. What is certain, however, is that Bernanke will not want to go down in history as the man who pulled the monetary plug prematurely on the recovery.