February 14, 2014
This Is Janet Yellen’s Biggest Challenge

The Fed is trying to put back with the right hand what it’s taking away with the left. But it might need to use both together if it’s going to speed up the recovery.

Ever since Lehmangeddon, the Fed has been stuck in a brave, old monetary world where even zero interest rates aren’t enough to jumpstart the economy. It’s a world that, outside of Japan, we haven’t seen since the 1930s. And one that the Fed has tried to find a way out of in fits and starts. By late 2012, it had settled on a two-pronged strategy to do so: purchases and promises. The Fed purchased $85 billion of long-term bonds a month with newly-printed money, and promised to keep rates at zero at least until unemployment fell below 6.5 percent or inflation rose above 2.5 percent.
But now these programs are winding down, and we still haven’t gotten the catch-up growth that’s always a day (or 6-12 months) away. The Fed started this return to normalcy last May when Ben Bernanke said that it would soon start reducing—or, in financial lingo, “tapering”—its bond-buying. Investors didn’t like this surprise, but the Fed didn’t like the one it got either. Even though its forward guidance hadn’t changed at all, the taper talk made markets expect the Fed to start raising rates much sooner than before. In other words, markets didn’t distinguish between the Fed’s purchases and promises. That’s because the purchases are what made the promises credible, the Fed putting its money where its mouth was.
So how much are the Fed’s promises worth today? Well, more than you might think, though there are still a few difficulties.
Read more. [Image: Reuters]

This Is Janet Yellen’s Biggest Challenge

The Fed is trying to put back with the right hand what it’s taking away with the left. But it might need to use both together if it’s going to speed up the recovery.

Ever since Lehmangeddon, the Fed has been stuck in a brave, old monetary world where even zero interest rates aren’t enough to jumpstart the economy. It’s a world that, outside of Japan, we haven’t seen since the 1930s. And one that the Fed has tried to find a way out of in fits and starts. By late 2012, it had settled on a two-pronged strategy to do so: purchases and promises. The Fed purchased $85 billion of long-term bonds a month with newly-printed money, and promised to keep rates at zero at least until unemployment fell below 6.5 percent or inflation rose above 2.5 percent.

But now these programs are winding down, and we still haven’t gotten the catch-up growth that’s always a day (or 6-12 months) away. The Fed started this return to normalcy last May when Ben Bernanke said that it would soon start reducing—or, in financial lingo, “tapering”—its bond-buying. Investors didn’t like this surprise, but the Fed didn’t like the one it got either. Even though its forward guidance hadn’t changed at all, the taper talk made markets expect the Fed to start raising rates much sooner than before. In other words, markets didn’t distinguish between the Fed’s purchases and promises. That’s because the purchases are what made the promises credible, the Fed putting its money where its mouth was.

So how much are the Fed’s promises worth today? Well, more than you might think, though there are still a few difficulties.

Read more. [Image: Reuters]

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  6. afloweroutofstone reblogged this from theatlantic and added:
    Not to self: use the term “Lehmangeddon”
  7. whimonthe reblogged this from theatlantic and added:
    I really wish the media would just lay off Kevin Federline for once.
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