Thanks for nothing!
David Beckworth recently asked former Fed governor Randal Quarles why the Fed didn’t move last fall to stop inflation. Here’s how Quarles responded:
Quarles: This is maybe an eccentric belief. I don’t think that it’s universally shared or even widely shared on the FOMC. But my belief is that it’s a separate element of the Fed religion that resulted in not moving in the fall, and it became clear that it was time to pivot to withdrawing accommodation, and it’s a long-standing kind of Fed principle that you shouldn’t step on the gas and the brake at the same time; meaning that you shouldn’t be raising interest rates at the same time as you are still increasing the size of the balance sheet. And so we had decided that we needed to taper the balance sheet purchases. The lesson of the taper tantrum under Bernanke was that you’ve got to telegraph that well in advance. You’ve got to do that gradually, in order to avoid disrupting markets. And you have to have completed that before you can start raising interest rates so that you’re not doing two conflicting things. So that was the sequencing.
Macroeconomics is full of myths. There’s a widely held (false) belief that the US ran unusually big budget deficits during the 1960s, and that the high inflation of the 1970s was due to supply shocks. The idea that there was a “taper tantrum” in 2013 that “disrupted markets” seems to be another popular myth. Where is the evidence for that claim?
FWIW, here is the S&P500 in the year after Bernanke’s May 22, 2013, speech on the need to eventually taper bond purchases (a rather obvious point, BTW):
Notice that the speech did not cause any stock market turmoil, either immediately or over the next 12 months. Nor was there any major market reaction to Bernanke’s speech in the bond market, although long-term rates did trend upwards due to a stronger than expected economy in late 2013. (The policy was unwise, but that’s because inflation was too low at the time.)
Quarles suggests that in the fall of 2021, the Fed responded to this phony “lesson” by doing nothing to restrain inflation. Today, frustrated stock and bond market participants must be grumbling “thanks for nothing”, as the Fed’s inaction ended up causing a market tantrum in 2022, with the economy surging to high inflation and as stock and bond prices falling sharply:
As I keep saying, the Fed should not focus on stabilizing financial markets; they should focus on stabilizing expected NGDP growth. Stable financial markets cannot be engineered artificially; they result from stability in the broader economy.
The Fed needs to keep its eye on the ball: