If the Fed Didn't Tighten In September, Why Expect It In 2014?
As has been the case for years, today's policy statement from the Federal Reserve was a non-event. After most market watchers were surprised by the Fed's inaction in September, there was absolutely no expectation that the Fed would do anything at this meeting. But what is surprising is that most people still expect some type of Fed tightening in the first quarter of 2014. If the Fed could not pull the trigger back in September with Ben Bernanke at the helm and the nation not yet traumatized by the debt ceiling drama and the Obamacare disaster, why should anyone expect tougher treatment from a Janet Yellen led Fed in a few months? This is particularly true when you understand that the risks the Fed has pointed to in the past (when deferring its tapering decision) will likely persist into the new year.
In fact, this statement, as all prior statements this year, makes it clear that the Fed is just as likely to expand QE as it is to reduce it. Rather than discussing the possibility for a taper the Fed merely states that it will "adjust" policy according to incoming data. But it never states what direction such adjustments may take. Nevertheless, the market is somehow still looking for a first quarter taper. The markets should conclude that the Fed will always come down on the side of accommodation. As a result, expectations for a taper anytime in 2014 are just wishful thinking.
Unlike just about every other economist, I knew that the Fed would not taper in September (see video) because the economy is still fundamentally addicted to stimulus. I believe that all the signs of economic recovery are just QE symptoms in disguise. Take away the QE and the economy will tilt back into a recession even more severe than the one experienced before QE1 was launched. But as long as the QE persists, the economy will never truly recover. Instead, QE infinity will insure the development of dangerous asset bubbles in stocks and real estate. However, just because the Fed will not taper does not mean that QE will go on forever. It will come to an end, but not because the Fed wants it to, but because the currency markets give it no choice. A dollar crisis will ultimately force the Fed's hand, and the longer the Fed succeeds in postponing the inevitable, the more damage its policy mistakes will inflict on our economy.