Scatterbrained Central Bankers


The exception is the taper hint put out in the minutes to the May 1st FOMC meeting released on the 22nd. Did that signal that the Fed was seeing an economic upturn down the road? That´s likely how markets interpreted the ‘hint’ because the increase in long term rates was accompanied by an increase in long term (10 years) inflation expectations (and an increase in real long term rates), all factors consistent with a future upturn in economic activity.

Notice that in September when the Fed communicated a “taper-off”, rates and expected inflation turned down (but real rates went up somewhat). In December when taper in fact began, interest rates recoil a bit but inflation expectations go back up, a ‘confusing’ movement.

Maybe markets are not so sure about what the Fed is signaling. Maybe markets feel that the Fed is mostly worried about the risks of QE. That´s consistent with the Fed´s worry about financial stability, something that featured prominently in Yellen´s Congressional Hearing. There´s even talk about “Financial Stability becoming a third mandate for the Fed.

I really am at a loss to understand (and this is also true of Mark Carney at the BoE) why the Fed completely forgets about the only thing over which it has substantial control, that being nominal stability. Don´t tell me that they cannot look back over the post war history and just ‘marvel at the benefits’ that nominal stability provided in terms of low and stable inflation and stable real output growth.

*Continue reading at Marcus Nunes’ blog Historinhas.


About the Author

Marcus Nunes
João Marcus Marinho Nunes is a partner of Phynance Estratégias Quantitativas e Investimentos and a professor of Economics at Fundação Getúlio Vargas in São Paulo, Brazil. He also blogs here:

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