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According to the Fed, These Are Our Targets…Maybe.

July 25, 2013
Fed pronouncements are meant to engender confidence and economic growth. That won’t happen if what they say can’t be trusted.

Federal Reserve Chairman Ben Bernanke testified before Congress on the 17th, probably for the last time as the Fed Chairman.  He suggested that the Fed might not taper its bond buying program (popularly known as QE3) even if the unemployment rate drops below 6.5%.  He gave various reasons for that decision, including the thought that the unemployment rate is not all that accurate a measure of employment health (something we have talked about in many presentations). 

The disturbing thing to me is that he/they may change a target that people have come to depend on in terms of gauging Fed actions.  The goal of these pronouncements and the issuance of targets are to help businesses have confidence in the future.  Moving the target, or making the target vague and amebic, does not make one prone to confidence. Granted, Dr. Bernanke may have wanted to calm the bond market with the assurance no near-term dramatic action would be taken, but that is the problem with setting hard targets.

Changing those targets, or making them vague, works against the goal of increasing stability and confidence.  A shifting target also allows the Fed to decide to keep QE3 in place longer than what is healthy for the US economy.  We should consider that the questionable benefit is not worth the potential cost.  I agree with Esther George of the Kansas City Fed when she stated that today’s bond buying program may destabilize financial markets and drive up long-term inflation trend. 

There is good news in that about half of the 19 of the Federal Open Market Committee want to end the bond-buying program this year.  I believe they need to do so in order for market forces to deal with existing imbalances and for these same unimpeded market forces to prepare the economy for solid gains in 2015. 

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