Great Fedspectations or Just Speculations?

One more good reason the Fed won’t taper until March

…and it is something we would never have guessed!

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COMMENTARY: Friday, November 29, 2013 Weekend Read

As we noted last Friday, there are still quite a few folks bothering to analyze the likelihood of Fed QE taper in December. Not only have we pointed out all the reasons that is likely silly, there was a new one presented by a very knowledgeable and reliable source just this week. Kevin Warsh is an ex-Fed governor and all around knowledgeable individual on central bank activity and psychology.

He recently cohosted CNBC Squawk Box, and there was naturally quite a bit of discussion of the Fed QE taper possibilities. As we have noted in our previous assessments, the bottom line is there will be no QE taper until Janet Yellen’s first meeting as Chairman in March. Period.

And now there is what Warsh said that we would never have guessed. Nor would most other commentators, even though it is glaringly apparent. And we found it as disconcerting as anything else we have mentioned that gives us significant pause on the overall Fed QE-Infinity program. But the new, troubling reason for no near term QE taper is…

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…that the Fed may have serious doubts on the reliability of its own forecasts!! And how could it not? It is the beast that nobody dare speak its name. Yet Warsh lays it out in the most straightforward fashion how this has been a problem not just for the past several quarters, but consistently ever since the 2008-2009 crisis.

The Fed forecasts have been miserably misguided. And mostly in expecting the reversion to mean economic trend which has just not shown up, even in the wake of such massively expanded and maintained QE since the initial enlightened effort back in 2009. Think about it… a Fed balance sheet north of $3 trillion headed for $4 trillion and US economic growth remains (on average) stuck in the low 2.0% area. (For more details on why that might be, see QE-Infinity II: Contained Depression from back on November 1^st.)

So that’s it. We promised it would be short and sweet for the Thanksgiving holiday weekend, and the video clip speaks for itself not just on that lack of Fed forecast reliability. It also notes one more issue that amplifies that additional incentive to avoid any near term QE taper…

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…insofar as Janet Yellen may be no more dovish than Ben Bernanke in general, but is definitely more committed to respecting the model. The model has been wrong in expecting that post-WWII reversion to median growth of approximately 3.0% or higher.

So it stands to reason that a model-driven Fed Chairman is going to have a real issue with moving prior to the actual growth showing up in the economy if their preferred perspective on the monetary accommodation and rates structure has not been reliable. It is not just a matter of whether Dr. Yellen will taper at her first meeting as Chairman in March…

…when can she ever taper QE short of overall signs that growth (and as the Fed has made clear of late, NOT just employment) is finally accelerating? And as any informed observer of central bank theory and practice knows, by the time accelerated growth is glaringly apparent, monetary policy is likely to be way behind the inflation curve.

It really does make the whole Fed QE-Infinity program expansion to such massive proportions appear more so speculation than any sort of expectation. Then again, as we noted last week, even Warren Buffet sees the QE-Infinity program as having turned the Fed into The Greatest Hedge Fund in History.

Thanks for your interest.