Matthew C Klein, Columnist

Fed Repudiates Its Own Economists

Academics and Fed researchers had been reaching a consensus that asset purchases don't do much for the economy. Today's decision repudiates that consensus.

September 18, 2013 at 9:17 PM UTC

By Matthew C Klein

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange. Before that, Klein was a research associate at the Council on Foreign Relations, where he spent more than two years studying the history of the Federal Reserve and the intellectual history of monetary economics for an upcoming book by Sebastian Mallaby. He also worked at Bridgewater Associates, where he studied the economies of Central and Eastern Europe and advised institutional investors on asset-liability management. Klein has a bachelor's degree in history from Yale University. Originally from Chicago, he lives in New York.

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The Federal Reserve has decided not to reduce the pace of its asset purchases because of concerns that the economy is too weak to handle even the slightest withdrawal of monetary stimulus. At the same time, the Fed refrained from adjusting the "thresholds" that will affect when it may start raising short-term interest rates. Together, these decisions are a repudiation of the emerging consensus on optimal Fed policy.

As I explained earlier today, Fed researchers and top outside academics are coming around to the view that the Fed's purchases of U.S. Treasury bonds don't actually do that much for the economy. Instead, they argue, the real action comes from something called "forward guidance." That's when Fed officials tell traders what factors will affect the future path of short-term interest rates. At first, the Fed simply promised that it would keep short rates near zero until a given date on the calendar -- a date that kept getting pushed further and further into the future.