What Was Bernanke Thinking? Here's My Guess

The economic case for tapering was never clear cut. 

Oh, goody. Six more weeks of will they or won't they (taper), six more weeks of analyzing the impact of asset purchases (negligible), six more weeks of speculating about the appropriate time for the first tiny reduction in the pace of bond-buying (December is a bad time to leave lumps of coal in the Christmas stockings).

The Federal Reserve took a pass on tapering today, preferring to "await more evidence that the recovery's progress will be sustained before adjusting the pace of asset purchases," according to the statement released at the end of the meeting. (Reading between the lines: "Recent manufacturing data have been encouraging, but those last two employment reports gave us cold feet.")

Fed Chairman Ben Bernanke looked as relaxed as I've seen him in years as he summarized the Fed's thinking on the economy and fielded questions from the press. ("Only one more of these in December before I'm outta here!") Being the classy guy that he is, Bernanke dodged the question about his future plans, saying he preferred to focus on monetary policy. ("My predecessor would have given you names, dates and contact information.")

The Fed lowered itsforecast for real gross domestic product growth next year, without changing its unemployment outlook. ("It's pathetic how little growth it takes to reduce unemployment these days.") And it reduced its projections for long-run full employment as well. ("In the long run, it will be someone else's problem.")

Most policy makers -- 12 out of 17 -- expect the first increase in the federal funds rate to occur in 2015. By 2016, the economy should be at full employment with the funds rate at 2 percent, according to the committee's median estimate. ("Let's keep our fingers crossed.")

Expect to read all sorts of criticism about the Fed's decision today to forego tapering and its failed communication strategy. ("Can I be any clearer that tapering isn't tightening or an immediate precursor to a funds rate increase?") The economic case for tapering was never clear cut. The best reason, in fact, was to eliminate the anticipation. ("I hope someone doesn't ask me to differentiate the effect of $85 billion a month versus $75 billion.")

Which brings me to a question a few readers have asked me in recent months, and I don't have a good answer. If the third round of the Fed's asset purchases is having such a negligible impact, why, they wonder, all the fuss in financial markets? ("When you figure it out, please let me know.")

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    Caroline Baum

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