Wilson County News
Commentaries header
Wilson County News • 1012 C St • Floresville • TX • 78114 • Ph: 830-216-4519 • Fax: 830-393-3219 • Email:
Thursday, Sep 18, 2014
Login
Not a subscriber? Click here.
Are you a WCN subscriber?
Set up your password.

 
E-Mail
Password
  Remember me
 
  Forgot password?
La Vernia News
Google
Google

Preview the Paper
Preview this week's Paper

Commentaries

The Economist: Blinders and Ear Plugs




E-Mail this Story to a Friend
Print this Story

Disclaimer:
The author of this entry is responsible for this content, which is not edited by the Wilson County News or wilsoncountynews.com.
January 22, 2014 | 991 views | Post a comment

The Federal Reserve System has begun to ease off ever so slightly on its quantitative easing (QE) program. As I’ve mentioned previously, the point of QE was to help revive the economy during the recent recession by providing liquidity (through bond purchases) and driving down interest rates. The trick (as with any monetary policy effort) is to know when to stop. Too much QE can cause numerous problems such as rising long-term interest rates, inflation, curtailed investment, and more. Too little and the recovery could stagnate.

One difficulty in making this decision is that there is simply no way to have perfect information about the economy and how it’s changing. Take unemployment, for example. One of the biggest problems of the recovery is that hiring has been frustratingly slow, and many Americans remain out of work. One of the measures the Federal Open Market Committee (FOMC) has tied tapering to is the unemployment rate. Until a target rate of 6.5% is reached, they don’t want to back off too much.

When the December unemployment rate hit 6.7% (a notable drop from just a month prior), it stoked debate about whether the Fed should taper even faster. At issue is the reason for the decline. Unemployment rates can fall not only because people find jobs, but also because they give up and stop looking. To be counted as unemployed, survey respondents must have looked for work in the prior four weeks. While there is some data regarding why people drop out of the workforce entirely, it’s imperfect. It is impossible to know what part of employment/unemployment changes is due to improvement in the economy (the cyclical component) and how much stems from shifts in demographics such as the aging of the workforce and natural increases in retirement (a structural component).

Another challenge in determining when to back off the pace of bond buying is predicting the response. If interest rates change, how much will investment change? How much is the liquidity propping up the economy and the stock market? No one can know the answers to these questions with perfect accuracy, and the fact that perceptions can drive short-term results can distort the picture even further.

Some market watchers fear that the Fed may be too negative about the economy’s prospects and may, therefore, wait too long to pull back. One bad memory for some is 1994, when markets were surprised by a sudden doubling of the Fed’s target interest rates. Overnight, the values of certain bonds dropped dramatically and the stock market soon experienced a major correction. The announcement of the increase came as a surprise (those were the days when the Fed was super-secretive about plans), as did the magnitude (then-Chairman Greenspan felt the time had passed for action, and corrected with a vengeance). Wall Street types worry about a similar dramatic reaction if the Fed waits too long and then feels a need to cut too much too fast. (Anyone with a stock or bond portfolio, even as part of a retirement account, should agree.)

Ironically, one reason the Fed might wait too long is if they pay too much attention to analysts and markets. Last summer, it looked like the Fed might begin to taper and, despite many caveats in the pronouncement, markets reacted with a vengeance. Chairman Bernanke was quick to reassure, and no tapering occurred for a while (though there were other factors, namely one of the several rounds of brinksmanship in Washington).

Within the FOMC, members have disagreed as to the proper course of action. Some debate and difference of opinion within the group is desirable, as it helps ensure a balanced and thoughtful decision process. In my opinion, it’s time to taper a bit (not too much), it’s good that it has begun, and newly confirmed Chairperson Janet Yellen, who has a healthy respect for job creation, and the rest of the FOMC should stay the course. There will be data points which are somewhat surprising (such as the unexpectedly small number of new jobs in December), and there will also be different interpretations placed on the data that does come out. They should put on blinders and ear plugs when it comes to the hue and cry which will doubtless be raised regardless of the chosen path, and make the best call based on the information they have. That is what independent monetary policy is all about.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.
 
« Previous Blog Entry (January 21, 2014)
 


Your Opinions and Comments
Be the first to comment on this story!

You must be logged in to post comments:



Other Commentaries



Commentaries


Commentaries page govtrack.us
Commentaries who represents me?
 
^Top
  Copyright © 2014 Wilson County News. All rights reserved. Web development by Drewa Designs.
^Top