Good news and bad news from the Fed


Stephanie Flanders reports on the impact of Wednesday's Federal Reserve announcement.

One of these days, you have to hope that the US central bank will think it's safe to starting turning off the taps. But it's not going to happen this month. And probably not the next one, either.

A sensible Martian would think it was bad news, that the US central bank thinks the world's largest economy still needs just as much emergency support as it needed a year ago.

But apparently, it's not. Markets everywhere have rejoiced.

Lesson one is that five years on from the start of the crisis, the global financial system is still a seriously screwy place.

Lesson two is that when Fed policy-makers said there was no "pre-set course" for winding down quantitative easing, they really wanted you to believe them.

In July, Chairman Bernanke said there would need to be a substantial improvement in the labour market for the tapering process to begin.

There has indeed been an improvement in the past few months - with unemployment falling to a five-year-low. But, as I mentioned in my piece for the TV news on Tuesday, that has been almost entirely due to people dropping out of the workforce.

If the labour force participation rate today were the same as it was in 2008, the unemployment rate would be over 10.5%.

Chairman Bernanke mentioned the decline in participation in his press conference, but he also said that the fall in unemployment over the past year had come mainly from new jobs. In that period, he noted, the private sector had created more than two million jobs.

It's not that the medicine isn't working, the chairman seemed to be saying - it's just that when it comes to the jobs market, we have an appropriately demanding definition of good health.

He and his colleagues are also worried that politicians warring over the national debt are going to hurt the recovery, yet again.

Finally, he does not want the rise in long term borrowing costs that's greeted all this taper talk to get out of hand.

For all these reasons, the Fed decided to stand pat.

The market conditions argument has a circularity to it: talk of tapering leads to higher market rates, which in turn puts the taper itself on hold.

But, it's not quite as simple as that, because Mr Bernanke thinks some of that "tightening" marks the bursting of a mini-bubble.

Many economists would say that long-term interest rates - or bond yields - in the first part of 2014 were just too low. They didn't make sense under any remotely plausible trajectory for the recovery.

In his press conference the Fed chairman seemed to agree. Up to a point.

He said that part of the upward move in rates since May had come from an "unwinding of excessively risky positions". The tightening that was associated with that process was "unwelcome", but the fact that the positions had been unwound would make the situation "more sustainable" from here on in.

So, the Fed chairman doesn't want people in the markets to take "extreme positions". But nor does he want any further tightening in financial conditions, more than 4 years into a recovery.

If you think there's a tension between those two things, you're not the only one.

Does any of this mean that the broad timetable for winding down quantitative easing is now seriously off track? I don't think so, but there are plenty who do. Certainly, the Fed has not made that timetable any easier to predict.

Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 23.

    For me, the most salient point is

    "He (Bernanke) and his colleagues are also worried that politicians warring over the national debt are going to hurt the recovery, yet again."

    although, it is not that politicians will play politics with this issue, but the simple fact that they have to raise the debt ceiling time after time.

    If that doesn't tell you something, nothing ever will...

  • rate this

    Comment number 22.


    This will eventually lead to another economic disaster akin to the 2008 financial crisis, the authorities didn't predict (or ignored)

    China is building up reserves of $. How does the US stop China buying up America or the rest of the world without a crash in the price of the $.

    This is an addiction America must wean itself off.

    Unfortunately western politics is short term survival

  • rate this

    Comment number 21.

    US can only do this because US$ is global reserve currency, and their economy is much more closed than rest of West. Its main purpose is to devalue US Govt debt. Global asset price inflation, including London and SE property prices, is a consequence, not just US domestic inflation.

    It is hard to imagine a world where US$ is not global reserve currency but each QE dose brings that day nearer.

  • rate this

    Comment number 20.

    Quite correct on all points.

    What we have here I liken to a plane without any wheels in the undercarraige. Whether the fuel runs out or not the only way to land is to ultimately crash.

    Inflation - current measure does not reflect reality to bods on the street. Convenient obfuscation for the bankster parasites.

  • rate this

    Comment number 19.

    So, inflation might ease a little, but the markets will also ease, and probably quite a lot...

    ...when oh when will we all accpt what has been patently true for decades...

    ....un/der regulated Neo-Liberalism capitlism DOES NOT WORK for anyone but the richest few...

    ...making it effectively like Communism as an economic system...

    ...& we all admit that doesn't work........

  • rate this

    Comment number 18.

    Bless you, Stephanie. You do try hard. The moment anyone in the mainstream media illustrates that they truly understand this situation I'll say a quiet prayer or open a nice bottle of wine.

  • Comment number 17.

    All this user's posts have been removed.Why?

  • rate this

    Comment number 16.

    Looks like Americans will have to wait 'til after Thanksgiving for their Federal cold turkey diet...

  • rate this

    Comment number 15.

    The US will have to accept higher interest rates and associated pain at some point. In my view they should have started the process last night.

    Prolonged money printing to pay off debts has never worked in the past - Germany, Argentina - and it won't work for the Yanks this time.

    The success of the policy to date is now at risk.

  • rate this

    Comment number 14.

    forget the smoke and mirrors, the simple truth is this.
    1. in the last 5 years the US government debt, has gone from 11trillion to 15 trillion,
    2. free money has kept house prices high and interest rates low.
    3 however real inflation is nearer 6 % if not more.
    when they stop the free money, interest rates will rise housing bubble will burst, banks will collapse.
    this they cannot stop.

  • rate this

    Comment number 13.

    This video, that I make no claim to, I'm just pointing you good people to it, this video offers the best, most easily understood explanation of 'the Fed" and what it is.


  • rate this

    Comment number 12.

    What happens if unemployment never drops below whatever?

    The trick with QE is that it gets harder not easier to remove it as time passes.

  • rate this

    Comment number 11.

    10 ~ when 'influenced' by over powering turbulence, the dragonfly ceased all effort and its bubble went where it was taken. Recovery always involved a zoom climb and nose dive decelerating into controlled flight. This occured with reflexes order of magnitude above our own.

    Once it realised l posed no threat the thing was dhowing off to me. Rather weird experience.

  • rate this

    Comment number 10.

    As our populations increase wealth will diminish exponentially.

    I was treated to five minutes of the flight of the dragon fly at height of summer. Quite remarkable aerial agility as it practiced maneuver. It was playing.

    Despite being at the mercy of gusting wind, it maintained a safety in a bubble of airspace where it could recover trim.

  • rate this

    Comment number 9.

    For those who have recently retired on a current reduced annuity the prospect of a burst of inflation is grim.

    And for those approaching retirement are bonds a safe place to keep the funds?

  • rate this

    Comment number 8.

    As pointed out by 66 at #3, the only downside to QE is inflation.

    This is a female dog to think through but is not an empirical debate. It is about yield and the stupidity of it as a measure. If you want to double yield, halve asset value :)

    That isn't accurate because the equation is exponential and not linear. Stocks are under valued trading as commodities marked to market and tax free.

  • rate this

    Comment number 7.

    Here's a lesson on the global outlook. Europe can no longer afford its energy costs. The EU is unable to grow as a bloc. It's stats are round and hairy.

    All asset value is over priced because of relationship to employment and wage levels. Investors are the problem whilst inflated returns are obtained from inflated asset values. Stock markets are under valued but with diminishing p/e tricks.

  • rate this

    Comment number 6.

    Well obviously the current situation has resulted in starting to send the £ up in value against the US $ and the A$ up in value against the £. Obviously the cuts in Australian Government School education is helping to keep the A$ up in value against the £ with the new Government trying to make up for failures to recoup tax in the mining and carbon tax areas.

  • rate this

    Comment number 5.

    A number of critical political arguments are rising over the US event horizon and sanity has prevailed at the Fed. Global markets have wobbled in anticipation of taper and capital flows have gone lemming into Europe, which as a political and economic risk, is a powder keg behind a firewall.

    There was a massive recent effort by the US to educate the EU of its global significance. Ho hum.

  • rate this

    Comment number 4.

    QE3 has nothing to do with Reducing Unemployment or Boosting Growth. Quite simply, if the Fed stopped buying Treasury Bonds, supply of bonds will exceed demand and yields will rise. If the yields rise then the Fed will loose control of the short term interest rates and the House of Cards will come tumbling down. If the Fed stopped buying Mortgage Backed Securities Housing will collapse;


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