Bernanke Kills Fed Credibility and the Confidence Fairy in One Shot

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from Naked Capitalism:


Bernanke Kills Fed Credibility and the Confidence Fairy in One Shot


How many markets are in upheaval right now? The ten year Treasury has gone from 2.18% to 2.44% in less than a day. Gold is down to $1288. Asia had a bad night with the Chinese interbank market going into even more distress than before (that can’t be laid mainly at the Fed’s doorstep but it sure didn’t help). The Nikkei was down 1.7%, which is almost a routine market move, but the Hang Seng also fell 2.9%. All major European stock markets are down over 2%. S&P future are down over 16 points, or roughly 1%.

We’ve pointed to several things that have been troubling about the Fed’s apparent view prior to the FOMC statement yesterday and the Bernanke press conference, which only rattled investors further. First was that the Fed seems to be suffering from a bad case of confirmation bias, in that it seems to be underweighing data that is inconsistent with the idea that the economy is getting better (as in on the path to decent growth, as opposed to a gear or two above stagnation). For instance, even though inflation continues to fall (a sign of weakness) the central bank is taking the view that that’s temporary, and it is also of the view that the sequester isn’t going to impose a meaningful drag.

But that may not matter. Fedwatcher Tim Duy highlights the fact that the Fed has a pattern of being too optimistic about growth, but is likely to stick to its guns on exiting QE when its unemployment thresholds are breached. And the big fail is that the Fed using the headline unemployment rate as one of its main metrics for when to wind down QE means it is choosing to stick its head in the sand as far as the severity of underemployment is concerned. This is the economic version of “peace with honor”.

Frankly, the real issue seems to be that the Fed has gotten itchy about ending QE. Who knows why. It may be 1937 redux, that they’ve gotten impatient with the length of time they’ve been engaged in extraordinary measures. It may be that they can’t face up to the fact that they might have gotten into a Japan-style QE forever (I believe Japan is now on QE 8). They might also worry about political backlash if the Fed balance sheet keeps growing, or that savers and investors are suffering in a low yield environment (more likely they are concerned about depriving banks of easy profits, like real earnings on float or easy yield curve profits). John Plender suggested in the Financial Times that Bernanke may be following the view of a recent Frederic Miskin paper, in which Miskin took the view that the Fed window for a QE exit was closing. ......................(more)

The complete piece is at: http://www.nakedcapitalism.com/2013/06/bernanke-kills-fed-credibility-and-the-confidence-fairy-in-one-shot.html

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1. du rec.