The Fed/FOMC is never wrong. It is markets that ‘misunderstand’ it! But they conveniently forget that as the “market” in market monetarism implies, market reaction IS the policy.
To ‘cover-up’ their bungling FOMC members have come out in line to in fact tell the markets that they were wrong (by saying the opposite, obviously) and set the record straight.
Financial markets are wrong to view the Federal Reserve as having become more hawkish in its views on the need to tighten monetary policy, Minneapolis Federal Reserve President Narayana Kocherlakota said on Monday.
William C. Dudley, the president of the Federal Reserve Bank of New York, has come out with the most forceful and clear commentary on what the Fed intends to do in the months and years ahead after Chairman Ben Bernanke’s press conference last week sparked a global market sell-off. There’s only one way to interpret Dudley: Markets got it wrong.
I want to emphasize the importance of data over date. If the Committee’s economic outlook is broadly realized, there will likely be a moderation in the pace of purchases later this year. If the performance of the economy is weaker, the Committee may delay before moderating purchases or even increase them. If the economy strengthens faster than the Committee anticipates, the pace of purchases may be moderated somewhat more quickly. The path of purchases is in no way predetermined; we will monitor economic data and adjust our purchases as appropriate.
In particular, I view Chairman Bernanke’s remarks at his press conference–in which he suggested that if the economy progresses generally as we anticipate then the asset purchase program might be expected to wrap up when unemployment falls to the 7 percent range–as an effort to put more specificity around the heretofore less well-defined notion of “substantial progress.”
It is important to stress that this added clarity(!) is not a statement of unconditional optimism, nor does it represent a departure from the basic data-dependent philosophy of the asset purchase program. Rather, it involves a subtler change in how data-dependence is implemented–a greater willingness to spell out what the Committee is looking for, as opposed to a “we’ll know it when we see it” approach.
When it comes to purchases of Treasury and mortgage debt, “we will continue this program until the outlook for the labor market improves substantially in a context of price stability,” San Francisco Fed President John Williams said. “Any adjustments to our purchase program will depend on the new economic data that come in,” the policymaker said.
And James Bullard came out ahead of the others to justify his dissent:
The president of the Federal Reserve Bank of St. Louis, James Bullard, says he dissented at this week’s Fed policy meeting largely because inflation is running well below the central bank’s 2% target and said the committee should have waited before authorizing Fed Chairman Ben Bernanke to detail a plan to reducing the size of the Fed’s bond purchases.
I know what happened. Given the similar sounding words “date” and “data”, people ‘misheard’ Bernanke so everyone had to come out and shout: “It´s all about DATA”
Update: From Binyamin Appelbaum:
The search for the best metaphor to describe the tapering of the Federal Reserve’s monthly bond purchases later this year rolled forward on Friday.
The latest contestant is the Richmond Fed president, Jeffrey Lacker.
“The Federal Reserve is not only leaving the punch bowl in place, we’re continuing to spike the punch, though at a decreasing rate over the next year,” Mr. Lacker said.
This was reminiscent of Thursday’s best effort, which also invoked an addictive vice.
“It seems to me,” said Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, “the chairman said we’ll use the patch — and use it flexibly — and some in the markets reacted as if he said ‘cold turkey.’ ”