giveth on forward guidance

The Taper Has Arrived! by Jared Bernstein

It’s taper-time, as the Fed just announced that starting next month they’ll be reducing their bond purchases from $85 billion to $75 billion.  A change of that magnitude would not show up in the real economy–there are those who question whether QE shows up at all; I’d beg to differ–look at mortgage rates and housing activity, for one–but for its impact on expectations regarding the Fed’s future plans.

And here, paradoxically, I’d say today’s move is probably stimulative (that was certainly the market’s reaction).  First, tapering isn’t tightening; they’re simply reducing the amount of punch they’re adding to the bowl by a few tablespoons.  Second, there’s this new language from the statement today (my bold):

The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal.

So from the perspective of monetary stimulus, the Fed giveth in terms of forward guidance and taketh away addeth less in terms of QE.

More to come…