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Bernanke and Fed can't make everyone happy today
06/19/2013 12:22 pm EST
On the one hand, financial markets want to hear him and the Federal Open Market Committee in the statement to be released today at 2 p.m. New York time and in Bernanke’s 2:30 press conference say that the Fed intends to stay the course on its program to buy $85 billion in Treasuries and mortgage-backed assets at least through September. Any reduction in the pace of purchases before the Fed’s October meeting would fall in the category of “earlier than expected” that has roiled global financial markets and currencies. That might, in turn, put the Fed’s efforts to revive the U.S. housing market through lower mortgage rates at risk.
On the other hand, Bernanke and a majority of the Fed, in my opinion, don’t want to offer so much reassurance that they risk putting too much in the way of “animal spirits” back into the financial markets. The Fed knows that it will need to taper off its buying program sooner or later and the more gradual The Taper is and the longer markets have to adjust to it, the less likely it is that market will swing to an extreme that could lead to a crisis. I think the Fed would like to stabilize markets here but not set off a monster rally.
Something that won’t show up in today’s announcement is what looks like a gradual change in the meaning of “full employment” led by economists at the regional Fed banks. In recent weeks economists at the Federal Reserve Bank of Cleveland and at the Federal Reserve Bank of Chicago have argued that many of the workers who have left the labor force during the Great Recession will not re-enter the labor force as the economy improves. Following that logic, the Fed doesn’t need to see the economy creating 250,000 jobs a month before it sees the unemployment rate dropping. Instead 150,000 a month (Cleveland) or even just 80,000 a month (Chicago) would be enough to signal that the labor market is improving.
I find the logic here impeccably circular: If the economy is weak enough so that more discouraged workers don’t re-enter the labor force, then the Fed should conclude that its job is done because these workers won’t re-enter the labor force since they can see there are no jobs for them.
Essentially, the Fed would have defined the problem away.
Don’t for a moment think that’s unlikely.
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