There has been enough procrastination at the Fed. It has acted like those old British “gentlemen´s club” where everyone is so well-mannered that nothing really happens, and boredom prevails.
Ryan Avent has two posts. On the first he quotes Tim Duy, who muses:
Whether the rest of the FOMC follows suit with this approach is another question, but the winds are definitely blowing in that direction. On average then, this is relatively dovish. The Fed is heading toward a policy direction that would explicitly allow for inflation somewhat above target and unemployment below target as long as inflation expectations remained anchored. One would think this should put upward pressure on near term inflation.
One would think, but one would appear to be wrong, as I mentioned yesterday. Mr Duy considers this and grows pessimistic:
Yellen’s speech did not even generate a knee-jerk response in the stock market today. I remember a time not long ago when any hint of dovishness was good for a 1% rally. Which…leaves me wondering if open-ended QE is the last of the Fed’s monetary tools. We now know the Fed will continuously exchange cash for Treasury or mortgage bonds until the Fed’s economic objectives are met. Uncertainty about the course of monetary policy has been largely eliminated. There is not likely to be a premature policy reversal. What if the pace of the economy does not accelerate, sustaining a large, persistent output gap and a low inflation environment? The Fed could increase the pace of purchases, but would this really change expectations? Can we get more “open-ended?”
On the second he shows this chart:
And wonders if the US economy can “step on the gas” when going uphill:
What should we make of this figure? Some will see secular stagnation at work. Others will blame macroeconomic policy: the zero lower bound, perhaps, or insufficiently stimulative fiscal policy. Some might point out that all of these countries are trying, simultaneously, to raise their external surplus (or get one in the first place). Whatever the story, it is a remarkable state of affairs. These economies account for over half of world output (for the moment, at least).
The WSJ has a similar take:
That humming sound in the background comes from America’s busy factories. Unfortunately, one reason you can hear it so clearly is the relative quiet in most other parts of the world.
Given that much of the strength in U.S. manufacturing has come from export-oriented sectors, it is hard for such a discrepancy to endure. Further complicating matters is the looming “fiscal cliff.” During the third-quarter earnings season, several companies mentioned both slow growth abroad and budgetary uncertainty at home as reasons they may restrain capital expenditures.
Illustrating with this chart:
And today´s inflation release which is accompanied by the Cleveland Fed´s inflation expectations indicates that long run (10 year) inflation expectations has been “dormant” while short term (1 year) expectations has bumped along to the beat of oil prices.
It seems that even if Bernanke leaves at the end of his term in 2014 “boredom” will continue to prevail. After all, “toes are sacred” and not to be stepped on!
HT: Becky Hargrove