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« Weighing the Week Ahead: Expecting Magic from the Fed? | Main | What is the right analogy: 2008 or 2009? »

September 21, 2011



Great, yeah you just need a link on the blog to say "follow me on twitter." Right near the "subscribe..." link would be logical, though better yet is a twitter icon.

Liberal Roman

I think it's pretty obvious now that the market was incredibly dissapointed by Operation Twist. Since, 2:15 PM yesterday the Dow has dropped 700+ points. That is not just a random sell the news type fall. That is awful failure by the Fed.

I actually agree with you Jeff that the Fed does a terrible job at explaining what it is trying to achieve through its policies. I am glad you read Scott Sumner. He suggests the Fed set a nominal target (preferably NGDP) and make it clear that it will do everything to achieve this target. In a fiat monetary economy, the central bank can hit any nominal target if it is truly committed to it. A couple weeks ago the Swiss central banks showed how its done. It said that it would do unlimited Swiss franc selling until the value of the Swiss franc fell to $1.20/franc. The market was convinced and the Swiss franc promptly fell.

No one really knows what Bernanke wants. 1% inflation? 3% inflation? 4%?. 3% Nominal GDP growth? 4%? 5%? What do you want???? He seems to just randomly be doing things without any target whatsoever.

The question now is what does Bernanke think when he sees such a fall in the market. Does he think, "ehh..whatever. Let's give it some time" or does he think "sh*t...i messed up".

I think he thinks the former.


Proteus - The Fed, despite enhanced transparency, has done poorly at explaining policies. Yesterday would have been a good day for a post-meeting press conference, even though it was not a meeting for official estimate changes.



Liberal Roman -- If you go back and read my QEII analysis, it holds up pretty well. I understand that my message differed from the regular trader mentality, which implied some mysterious connection between Fed actions and futures prices. My mission is to separate economic reality from sloppy causal reasoning. Please -- look again. You will see that I often wrote about the psychological effect versus the actual effect. I also expressed disappointment that Bernanke did not really explain policy in his press conferences.

Thanks for mentioning The Money Illusion, which I have been reading for some time.

Thanks for joining in - perhaps more this weekend, but it is hectic today.



inkerton -- I tweet via @dashofinsight including both post notifications and a few other comments.

I should feature this on the page somewhere.



Liberal Roman

Well you could say he wouldn't allow deflationary expectations to set in, but he just tightened monetary policy yesterday with his stupid Operation Twist. I mean the man has been at the helm of a Fed that has run some of the most deflationary, tight monetary policy in 70 years. So, I wouldn't put anything past him.

We are screwed fellas.


Here is an edited comment from another blog I read:
"The FED tightened monetary policy by flattening the yield curve." The comment was made by an experienced trader. Not sure where I stand on that line of thinking, but I suspect it's a commonly held opinion.


Oh I think it's very wrong to suggest the Fed isn't open to further balance sheet expansion. Bernanke is running that show, and he could give a rats a$$ about being elected to another 4-year term as Fed Chair and now much Rick Perry likes him. He will not allow deflation or deflationary expectations, period. And so, it's very possible the Fed will expand its balance sheet further in the future, and/or take additional "unconventional" measures, particularly if things get crazy as a result of events in Europe.

Liberal Roman

I think you are very wrong here. I think what the Fed did was disappoint the market greatly. Not only did they do the stupid and useless "Operation Twist", they said nothing about even the possibility for more actions. In effect, they tightened the monetary policy expectations. And if you know anything about monetary policy, you know it's all about expectations not the actual actions themselves. A large increase in the monetary base does nothing if the market expects it to be temporary. But it can do something, if the market knows that the Fed wants higher inflation. The Fed is dissapointing in setting these expectations.

Jeff, I would recommend to you Scott Sumner's blog

He basically blames the entire recession on Fed's TIGHT monetary policy. As a sample, here is his post on today's Fed dissapointment:

To put it simply, you continue to underestimate the Fed's impact on the market. I remember last year you claimed QE2 would do nothing and yet the market and the economy picked up almost immediately after it. You then said that the end of QE2 wouldn't matter. And yet almost on cue, the market and the economy started faltering this past spring. You claim that Fed's actions are now meaningless. But the market always seems to have large reactions to each and every Fed dissapointment.

My forecast now is that we drop even farther if it seems that the Fed really is committed to doing no more balance sheet expansion and no more committment to holding the balance sheet size at its current level or higher for years to come.


You need a twitter feed, if only to state when you post articles. I and (I think) a lot of other people are using twitter instead of an RSS feed. Just FYI.

Jack Reacher

It was just sell the news.

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