How Will the Next Fed Chair Unwind QE?

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Sept. 18 (Bloomberg) -- American Action Forum President Douglas Holtz-Eakin, Citigroup's Nathan Sheets, BofA Merrill Lynch's Michael Hanson and Guggenheim Partners' Scott Minerd discuss the outlook for Fed policy on Bloomberg Television's "Street Smart." (Source: Bloomberg)

That is right.

Peter cook, thank you.

We want to bring in our whole panel.

We have scott.

Michael from bank of america.

We have the president of the american action for them and the global head of global international at citigroup.

I have to say, over at bank of america, you were the only was to say no taper.

And you were right.

What brought you to this conclusion?

Basically if you look at the data, it just was not there.

The fed was looking for more momentum.

Growth with disappointing -- growth was disappointing.

They were not seeing inflation coming back up though.

It was a very difficult decision.

Our view was it was not warranted in the data, and was mentioned with some of your other members, there was a lot of uncertainty coming back online, particularly with what is happening in washington.

It's not just political.

It is not just the debt ceiling.

If the fed pullback, what would that have done to the economy -- if the fed hold back, what would that have done to the economy?

I think it would have mean treasury yields, mortgage rates, a further increase in mortgage rates would jeopardize the housing recovery.

If i could but one reason or word why the fed did not get started today, it was the worry about where we are in this housing recovery.

They do not want to jeopardize.

They want to watch and wait a little bit longer, make sure it is solid and stable.

It was only 10 bali -- it was only $10 billion.

And the market was anticipating it.

Could they not have just done it?

They could have done it.

They believe their policy works.

If you look at the data, then they do not taper.

There is nothing in the data to suggest any kind of momentum.

We are decelerating.

Then there was the communications credibility.

They said, boy, we have been telling people.

We have got to come through.

The chairman said pretty quickly, we don't care.

Get over it.

It is going to be rocky when they exit.

The market jump just proves that.

It will be that in reverse.

I thought they would move before they had a new chairman.

Do you think that this is a blind test for new chairman, greece the -- grease the wheels?

Congress reacts poorly to everything.

It could be a tough thing.

We want to go to scott, who is investing based on what the fed is doing.

Scott, how might this change what you do when you hear from the fed chief?

In other words, as douglas was just pointing out, the market expected one thing.

He communicated one thing.

Then it totally changed.

How do you take that?

Trish, i am 100% in your cap and what douglas has said.

Look, the fed told us to rely on their forward guidance.

We are shifting away from qe and we will have forward guidance being the primary monetary tool.

But they have led the markets down a path to be surprised by their action.

So, it really raises questions about what am i supposed to think about forward guidance?

What credibility does the fed have?

It results in two things.

It results today in essentially a monetary easing, and it is telling me we have a lot more market volatility, because the market not only has to go with what the fed is telling it, but the market starts to have to guess if the fed is changing his mind or they are understanding the guidance and the way it is being presented.

Do you think the fed would be better off being more quiet and take a page out of greenspan's book, not saying as much?

Alan greenspan once said "if you understood what i said, you obviously were not paying attention." [laughter] he had a good way of getting people to understand there is a lot of uncertainty in the execution of policy and the timing.

If the fed can give some impression of what it might do, ultimately it has to have complete and dependence to do what ever it has to do at the last minute.

I think what dr.

Bernanke did is he raised the uncertainty around the fed action which was completely inappropriate given that the fed is an independent body and has to do what it has to do given the latest information it has.

I think the genie is out of the bottle.

They are putting out more data about this.

There is no way to put it back in.

The part that i have sympathy about, we really do not know how these tools work.

Now we have a range of opinions about what the tools will be.

We have a range of uncertainty and that is what we are seeing every day.

You are communicating to people in the american action for him.

That is part of your mission, right?

Are we going to say collectively , we got it wrong and chairman bernanke -- i mean, how do you resolve that notion that somehow he is right and all of the rest of us are wrong here?

I don't think that is true.

They had a real setback from the communications strategy.

This was not a good moment.

You cannot trust what they are saying.

They have to lay out genuine forward guidance.

That is a problem that has not been solved.

I agree with the discussion here.

We understand why the fed did not go today.

The bar for the economy they had set, the bar for the recovery had not been satisfied.

Now the question of the federal reserve is they are very dependent on communication.

They are very dependent on forward guidance.

How do we deconstruct the communication strategy?

They had a chairman say that they wanted to be done with qe with unemployment rate at seven percent.

We now have unemployment rate of 7.3%, and we are not even getting started yet.

So red lines are a little less read no matter what -- very good.

[laughter]

This text has been automatically generated. It may not be 100% accurate.

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