No tapering, but no rule either. Net, net that is bad

I just arrived in New York and I will spend the next couple of days in the New York and Boston. For once my timing is good – the Federal Reserve just announce that there is not going to be any tapering.

Scott Sumner is happy, but I must admit that I for once disagree with the Fed on the hawkish side (kind of). Not that I am not favouring monetary easing, but I don’t really think that the important thing is the amount of quantitative easing the Fed is doing in the sense of 10 or 20 billion dollars more or less per month relative to Fed communication.

Blackrock’s Larry Fink is speaking on CNBC as I am writing this. He is saying that minor tapering with better guidance would have been better. I agree on that. I would much more have liked to see the Fed coming out today spelling out its monetary policy much more clearly. The fact is that the US economy is getting better – slowly, but surely so tapering is justified sooner or latter.

After all the Fed has now spend months getting the markets ready for the tapering and now it didn’t “deliver”. Not that I want tightening US monetary policy, but I want much better communication and better rules. The Fed didn’t move in that direction today. That is a missed opportunity. Today the fed could have tapered by 10 or 20 billion dollars, but at the same time clearly spelled out a rule for money base growth. It didn’t do tapering, but didn’t spell out a rule. Remember – Market Monetarism is not about monetary “stimulus”. It is about a rule based monetary policy. And remember the Fed could actually have eased today with a clear rule AND done tapering at the same time.

There is still good arguments for monetary easing in the US, but relative to the need for spelling a clear monetary policy rule that it unimportant.

Unfortunately I don’t have more time for blogging now – I am off to dinner with a good friend who happens to be another Market Monetarist. Try to guess who it is…

PS Larry Fink is also talking on CNBC about the debt celling. I don’t care about that. Lets just ignore it. Phew Larry Fink thinks Larry Summers would be a great Fed chairman. I don’t.

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2 Comments

  1. Benjamin Cole

     /  September 19, 2013

    Yes better guidance, but not cutting QE sends a guidance signal, perhaps stronger than words….

    Little noticed, Bernanke said today that a “floor” on inflation was a worthy idea and should be part of guidance too…

    My problem: Any floor below 2 percent is risky and a stumble away from ZLB. But 2 percent is also the target and the ceiling.

    And how close can the Fed keep inflation to exactly 2 percent?

    And when did 2 percent become a magic number?

    Of course, favor NGDP targeting….

    Reply
  1. Two cheers for the Yellen-Bernanke Fed’s smart QE move | AEIdeas

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