While much has been written about yesterday’s FOMC decision and Chairman Bernanke’s press conference, some important points have been missed that may shed new light on the state of the Committee’s current thinking about its asset purchase program and how it is likely to be managed. In particular, the Chairman suggested that the Committee might adjust the pace of its asset purchases to its perception of the state of the economy rather than simply terminating the program abruptly. Indeed, he indicated that even if purchases were scaled back, the Committee wouldn’t hesitate to increase them again if conditions warranted.
The press pushed the Chairman on two points. What would the Committee have to see to change its program? Why didn’t the Committee provide guidance about changes in the pace of its asset purchase program, the way it did for its current policy accommodation? The answers and their lack of specificity were enlightening. First, consider the fact that the Committee reaffirmed its present policy accommodation in the face of an improving economy and four months of job growth topping 200K per month. The inference is that what we have seen didn’t exceed the Committee’s threshold criteria to change its asset purchase program. So how much improvement would be enough? The Chairman bobbed and weaved on this point, referring to the need for evidence of “sustained” improvement in labor markets. But when pressed about what “sustained” meant, he indicated that the Committee would look at many factors, all unspecified. So on this first question, we now know less than we thought we did before.
The Chairman’s response to the guidance question was equally uninformative. He indicated that there was considerable disagreement among participants about the impacts that the QE programs were having, which made it difficult to set quantitative guideposts at this time. In other words, “We know it is working, we just can’t precisely quantify its impacts.” Given the state of the Committee’s knowledge about the quantitative impacts of its asset purchase program, it is understandable that it would be doubly hard to ascertain the likely impact of a slight modification in the asset purchase program, to a level of, say, $40 billion per month as opposed to either $30 billion or $50 billion. In economist-speak, the Committee has no idea what the impact multipliers look like.
So where does this leave us? Unfortunately, we now know less than we did before, because we don’t know what criteria will be employed to adjust the asset program or by how much it will be adjusted. Moreover, given the Committee’s indication that now the program may not only be extended but also incrementally adjusted up or down, projections about the ending of the program and the timing of the exit from policy accommodation are now less certain. Finally, while the incremental adjustments in additional purchases were discussed, the same kinds of considerations also apply to incremental asset sales from the program once a reversal in policy begins.
The whole discussion yesterday is reminiscent of Justice Potter Stewart’s famous conclusion when wrestling with the problem of defining obscenity. While he stated he couldn’t define it, he noted, “I know it when I see it.” After reflecting on Chairman Bernanke’s discussion of the FOMC’s current thinking on the pace of asset purchases, I think Justice Potter’s statement is an apt description of what we learned yesterday as well. They can’t define when it will be time to act, but they will know it when they see it.
Source: Cumberland Advisors Commentary
