Time for the Fed to go dark

Cliff 1066 (Flickr) (CC BY 2.0)

Chairman Bernanke’s testimony yesterday was yet another attempt to calm financial markets, which have been spooked by the prospect of the wind-down of the QE program. His message on QE was the same as it has been for weeks. First, if the economy evolves as the Fed projects, tapering would begin later this year and the QE purchases would end around the middle of next year. Second, the timetable is entirely data-dependent. This is an important part of the message. If the economy is weaker than the Fed projects, the QE program will stay in place for longer than indicated by the tentative timetable. Markets have been volatile, in large part, because investors initially didn’t hear the second part of the message and only now seem to be grasping what Bernanke has been trying to say for weeks.

Bernanke’s other central point, repeated again yesterday, is that the Fed intends to keep monetary policy highly accommodative for a long time after the QE purchases come to an end. He indicated again that the first increase in the federal funds rate could come well after the unemployment rate reaches 6.5%, the threshold level identified by the FOMC. In essence, the Fed is trying to tell the market that it’s pivoting to a more conventional mix of policy instruments — less use of asset purchases and greater reliance on the federal funds rate. The challenge has been to make the market understand that this change in mix does not constitute a policy tightening.

Now that Bernanke has had some success in conveying this message, it might be best to just stop talking. Any changes to the QE program later this year will be determined by what the Fed learns about the economy between now and then. Nothing more can be revealed now that will clarify the situation. The market craves certainty about the future, but Bernanke can’t provide that. The Fed can only wait for more data and then act on the game plan it has laid out.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Stephen D.
Oliner
  • Stephen D. Oliner is a resident scholar at the American Enterprise Institute (AEI) and a senior fellow at the University of California, Los Angeles (UCLA) Ziman Center for Real Estate.

    Oliner joined AEI after spending more than 25 years at the Federal Reserve Board. An economist by training, Oliner held a number of high-level positions at the Fed and was closely involved in the Fed's analysis of the US economy and financial markets. Since leaving the Fed, Oliner has become well known for his analysis of US monetary policy and has maintained an active research agenda that focuses on real estate issues and the US economy’s growth potential.  He is coprincipal developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.

    Oliner has a Ph.D. and an M.S. in economics from the University of Wisconsin. He received a B.A. in economics from the University of Virginia.

  • Phone: 202.419.5205
    Email: stephen.oliner@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: 202.419.5212
    Email: emily.rapp@aei.org

What's new on AEI

image Getting it right: US national security policy and al Qaeda since 2011
image Net neutrality rundown: What the NPRM means for you
image The Schuette decision
image Snatching failure from victory in Afghanistan
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Wednesday, April 23, 2014 | 12:00 p.m. – 1:30 p.m.
Graduation day: How dads’ involvement impacts higher education success

Join a diverse group of panelists — including sociologists, education experts, and students — for a discussion of how public policy and culture can help families lay a firmer foundation for their children’s educational success, and of how the effects of paternal involvement vary by socioeconomic background.

Thursday, April 24, 2014 | 12:00 p.m. – 1:30 p.m.
Getting it right: A better strategy to defeat al Qaeda

This event will coincide with the release of a new report by AEI’s Mary Habeck, which analyzes why current national security policy is failing to stop the advancement of al Qaeda and its affiliates and what the US can do to develop a successful strategy to defeat this enemy.

Event Registration is Closed
Friday, April 25, 2014 | 9:15 a.m. – 1:15 p.m.
Obamacare’s rocky start and uncertain future

During this event, experts with many different views on the ACA will offer their predictions for the future.   

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.