As described by James Pethokoukis, someone gets it exactly right:
To Paul Edelstein, director of financial economics at IHS Global Insight, those opinions may have “inadvertently” produced a tighter monetary policy by altering expectations:
We don’t expect the Fed to curtail or reign in QE3 next month. There are too many voting members who favor continuing bond buying until the labor market outlook improves. And it won’t improve by March.
But the fact that Fed hawks were able to force a debate on the issue makes monetary policy less effective. This is because markets and the public will question the Fed’s commitment to keeping policy in place until it achieves its goals for unemployment and inflation. If markets do not expect the Fed to stay the course, then expectations for economic growth and inflation will stay depressed and demand for safe assets (cash and government securities) will remain high. Counter intuitively, this means lower long-term interest rates, not higher.
Markets will now adjust their growth and inflation expectations downward. Already, the stock market is down 1% (suggesting weaker growth expectations), gold is off 2.6% (suggesting weaker inflation expectations), and the dollar is up about 0.7% (suggesting stronger demand for safe assets). The 10-year Treasury rate shed a few basis points.
There is little that Ben Bernanke can do to quiet the dissenters on his committee. If they feel that QE3 should end this year, they will express those opinions in public and official forums. But what Bernanke and the majority of Fed participants that support ongoing bond buying can do is to more forcefully signal to markets that they will stick with their original plan and stay the course until unemployment comes down. They didn’t do this enough at last month’s Fed meeting, and the minutes portrayed the Doves as leaning on their back foot in the debate.
The dissenters at the FOMC must know that the more they express their opinion, the tighter monetary policy becomes, just as they wish!
Note: But Mr. Shepherdson doesn´t quite get it:
Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors, said investors should not be misled by the amount of space in the Fed’s account concerned about its current policies, because the Fed’s chairman, Ben S. Bernanke, and his supporters, continue to regard the asset purchases as a necessary and effective strategy to foster job growth.
“We view Mr. Bernanke as being firmly in charge of the committee, and very dovish indeed,” Mr. Shepherdson wrote in a note to clients. He said he expected the Fed’s asset purchases to continue at the current pace for the rest of the year.
It´s not either/or but lots of ‘shades of grey’.