Wednesday, December 18, 2013

FOMC announces small taper

Looks like the perpetually confused FOMC is deciding to scale back the monthly purchases a bit: $5 billion in MBS and $5 billion in Treasuries.

http://www.washingtonpost.com/business/economy/fed-to-scale-back-stimulus-by-10-billion/2013/12/18/54dc2ee4-6747-11e3-8b5b-a77187b716a3_story.html?wpisrc=al_comboNE_b

Any predictions? I doubt that such a small change in the quantity of purchases will have much of an effect anyway. What I am sure about is that this decision will spur a whole flurry of misinformed comments on QE. For starters, the above article repeatedly referred to it as "stimulus".

9 comments:

Dan Kervick said...

I predict it will have some effect, because the markets are driven by what they think various pieces of news mean, not what it actually does mean. QE is a placebo, but yanking a placebo away from people who think it's not a placebo can have an impact on them. All of the Fed fanatics who are convinced the Fed is "pumping money into the economy to keep it afloat" will take this as negative news, and that will impact their behavior.

The Rombach Report said...

Dan - Great post. This is where perception becomes reality.

James said...

At the top of the NYTimes right now is a picture of Bernanke an the caption says he is trying to make the point that tapering is not tightening. If that is true, then the QE is not stimulus, by logical necessity.
The only effect is from those who think it has an effect and by the reaction of others who try to determine how many think it will have an effect and then how those people will react, and on and on.
Blah, blah, blah.

Dan Kervick said...

James, yes I think you are right. I think the Fed recognizes it has gotten itself into a sort of communications trap with QE by over-hyping it and getting the markets addicted to it, and now wants to convince people that there are other ways of preserving "loose money" without so much QE. The want inflation to rise back to 2%, and want people to believe that inflation will rise because the Fed wants it to rise and will "let" it rise. Its all smoke and mirrors one way or another, but they want to back off the old smoke and try some new smoke.

We're in an era of hyper-reflexive "postmodern" monetary policy, where nothing has any actual foundation, but where effects are thought to be achieved simply by managing the expectations that effects will be achieved.

Lot's of people have no idea what they Fed actually does when it is not making public statements, and the Fed believes it can manage the expectations of these people just by continuing to pretend it possesses an obscure and secret source of power.

Shamanistic economics, as I once called it.

The Rombach Report said...

"At the top of the NYTimes right now is a picture of Bernanke an the caption says he is trying to make the point that tapering is not tightening. If that is true, then the QE is not stimulus, by logical necessity."

Bravo James! You nailed it!

Tom Hickey said...

Shamanistic economics, as I once called it.

Aka magical thinking.

James said...

And I only begin to understand all this because of the contributors to this and the other MMT blogs. Thank you for all your hard effort over the years.

James said...

Yes to the smoke and mirrors.
All they really do is set an interest rate, which most evidence suggests has little effect on the economy over a fairly broad range.
But they change it and then something happens and they believe they caused it. Definitely Shamanistic.

The Rombach Report said...

"Shamanistic"

Yes! Great analogy! Like Warren Mosler's comparison to Aztec economics, or demanding human sacrifices to assure the sun keeps rising.