There is great hubbub over a Federal Reserve meeting this week at which nobody is expecting any policy change to be announced. And the reasons why have more to do with the strange psychology of markets than any information we’re actually likely to get about the future of the central bank’s policies.
The reason for the high-volume conversation, of course, is that everyone in the financial world is obsessing over when the Fed will begin to taper down the size of its monthly injections of money into the economy. In the last month alone, the words “federal reserve” and some form of the word “taper” appeared in 1,923 news articles in the Nexis database (the number was 12 in the same period last year). Will the Fed go from buying $85 billion a month in bonds to, say, $60 billion in September? Or December? Or, gasp — high-pitched scream — even this week? Financial commentators are carrying on that guessing game with the giddy attention usually reserved for teenage girls talking about Justin Bieber, and that may be a little unfair to teenage girls. OMG.
But the frenzied speculation is misunderstanding what the decision to taper means. As such, ordinary investors might do themselves a lot of good by turning off the TV and shutting off their news feed between now and, say, Thursday. Because there isn’t a lot that the Fed, or Ben Bernanke in his post-meeting news conference, are likely to tell us that will actually answer the question of when the Fed’s easy money policies are going to end. Like people obsessing over a boyish pop star, it's a lot of huffing and puffing and use of mental energy that amounts to not much of anything.
Tapering is not tightening, as we’ve written here before. Pumping less additional money into the economy each month is not the same as raising interest rates or sucking money out of the economy by reversing earlier bond purchases. But it’s bigger than that.
It’s not even necessarily the case that an earlier date of starting the great taper will mean less total monetary easing out of the Fed. The central bank may well continue bond purchases longer, at a lower monthly rate, expanding its $3 trillion balance sheet by just as much, in total, if the taper begins in December as if it had begun in June.
It also doesn’t shed any real light on when the Fed will increase its short-term interest rate target, which has been near zero since the end of 2008. In the past few weeks, expectations for when that day might arrive, with markets pricing in something in 2014 instead of out in 2015. The Fed has made clear the circumstances that will make them start thinking about raising the short-term rate, though: an unemployment rate that has fallen to 6.5 percent or an inflation rate set to exceed 2.5 percent. Nothing in the recent data has made those milestones look appreciably closer than they looked a month or two ago. Fed forecasts to be released at 2 p.m. Wednesday will tell whether the officials themselves agree with that view, and so, as Jon Hilsenrath and Phil Izzo wrote today, are particularly worth paying attention to.
So the “When will they taper” debate, for all the market obsession, isn’t really the right question. The questions should be this: If the economy evolves as expected, has the Fed become any more or less inclined to maintain its easy money policies than it was a few months ago? I am reasonably confident that the answer to that is no, and that the volatility we’ve seen in markets around the tapering debate is not grounded in something real. But if I’m wrong, and the answer is yes, this is Bernanke’s moment to explain what has changed and why.
The messy reality of transparency is this: There are 19 officials who gather around the FOMC table eight times a year and each have a public platform, and each has a unique set of things they emphasize: The inflation rate versus inflation expectations; unemployment versus the growth rate; the risks of the Fed taking over the Treasury market versus the risks of asset bubbles.
That cacophony of voices has led people in markets to view the course of Fed policy as more volatile than it actually is. In truth, there’s not much reason to think that the men and women around that big mahogany table are thinking all that differently about the outlook for the economy, and the costs and benefits of QE and low interest rate, than they were three months ago or six months ago.
If I’m wrong, this is Ben Bernanke’s big moment to tell us. In the meantime, all of us obsessing over when the taper might occur are just a bunch of Beliebers.