The Federal Reserve has a dual mandate: maximum employment ( between 5.2% and 6% unemployment ) and price stability (currently, inflation at 2% or less). After last Wednesday’s decision on ‘the taper’ I think they should take a page from the medical profession and add a third mandate, “do no harm.”
I believe the Fed’s decision to nix tapering of QE3, despite the fact it was expected by many (it seemed to be priced into the bond and stock markets) may be one of those instances of doing unnecessary harm. It gives an undue importance to the Fed’s government bond and agency mortgage backed buying program (see session 35). Come on, we will have to deal with this some day soon. And, instead of being off the table as topic of conversation, it remains remains front and center (a favorite media topic). Compounding the problem is the flow of confused taper commentary emanating from various Fed Governors.
Many would say QE has done great harm. I’m not of that mindset, but enough is enough. To taper is not to raise short-term rates, contract the money supply or reign in credit. It would basically be a slight tweak and gradual end to QE’s humongous infusion of liquidity into the credit markets and ballooning of the Fed’s balance sheet.
I guess there is a silver lining to this cloud. It provides the media and investors with something to obsess about after the possible government shut-downs on the ‘continuing resolution’ and debt ceiling debates are decided. If a shut-down does occur, my bet is the heat will be so great on Congress, a quick resolution will be had.
What won’t be troubling the markets is the outcome of the German elections. Chancellor Merkel was reelected quite handily. Had she been defeated, many thought this could trigger bigger problems for the Euro-zone, as more conservative hands might force even greater austerity on the European Union’s weaker sisters. Scratch one item from “September worries” list.
Add one item back, as the Fed did a little harm by not initiating a the taper. Hopefully, as they muddle through the next few months, this too will drop off the list.
Meanwhile, sit back. Relax and enjoy all those “countdown to the shut-down” clocks that are popping up all over the tube. Who knows, this might be the beginning of a real correction.
I say, “Be not afraid.” This too will pass.
What do you think?
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