Fed rejects taper, retreats on growth projections

posted at 10:01 am on September 19, 2013 by Ed Morrissey

The Federal Reserve surprised most observers yesterday by continuing its extraordinary stimulus through monetary policy in place — and at the same time undercut the White House messaging on the economy.  The New York Times reports that Ben Bernanke’s announced “stunned” the financial sector:

All summer, Federal Reserve officials said flattering things about the economy’s performance: how strong it looked, how well it was recovering, how eager they were to step back and watch it walk on its own.

But, in a reversal that stunned economists and investors on Wall Street, the Fed said on Wednesday that it would postpone any retreat from its monetary stimulus campaign for at least another month and quite possibly until next year. The Fed’s chairman, Ben S. Bernanke, emphasized that economic conditions were improving. But he said that the Fed still feared a turn for the worse.

He noted that Congressional Republicans and the White House were hurtling toward an impasse over government spending. That was reinforced on Wednesday, when House leaders said they would seek to pass a federal budget stripping all financing for President Obama’s signature health care law, increasing the chances of a government shutdown.

And the Fed undermined its own efforts when it declared in June that it intended to begin a retreat by the end of the year, causing investors to immediately begin to demand higher interest rates on mortgage loans and other financial products, a trend that the Fed said Wednesday was threatening to slow the economy.

“We have been overoptimistic,” Mr. Bernanke said at a news conference Wednesday. The Fed, he said, is “avoiding a tightening until we can be comfortable that the economy is in fact growing the way that we want it to be growing.”

The Washington Post’s Ylan Mui points out that the US economy keeps missing its growth expectations, and the Fed didn’t have much choice.  The announcement that the policy would continue was accompanied by downgrades in the Fed’s projections on growth:

Stock markets soared to record highs as investors welcomed the unexpected announcement of more stimulus. But the Fed’s message about the recovery was not so rosy, and officials again cut their forecasts for economic growth. …

The last time the Fed tried to jump-start the economy through buying bonds, a process known as quantitative easing, it was criticized for cutting off the program before the economy had fully healed. The decision to stay the course now shows that officials are determined not to make the same mistake again.

And they are growing more pessimistic about the economy. Fed forecasts for growth in the nation’s gross domestic product range from 2 to 2.3 percent this year, down from the 2.3 to 2.6 percent predicted over the summer. GDP growth is expected to pick up to between 2.9­ percent and 3.1 percent next year [note: down from previous projections of 3-3.5%]. …

But much of the incoming economic data have been murky. The economy expanded at a 2.5 percent annual rate during the second quarter, but job growth has come in fits and starts. Hiring has fallen short of many analysts’ expectations.

John Makin at AEI blasts the Fed for creating the conditions that now require it to continue with its monetary expansion, and neatly describes the hole they’ve created for themselves with this policy:

To put the same thing another way, after managing to introduce the additional drag of sharply higher interest rates and attendant signs of a housing relapse, by talking, prematurely as it turns out, about tapering, the Fed cited a “tightening of financial conditions” (that it had caused) as a reason not to taper. The FOMC, it turns out, needs to see “more evidence that progress (on the economy) will be sustained before adjusting the pace of purchases.”

So much for helpful “forward guidance” from the Fed. In case the always-optimistic Fed economic forecasters haven’t noticed, there was never a reason to talk about tapering in view of an economic pick up. During the first half of 2013, the US growth rate averaged a 1.8% pace, the unemployment rate dropped modestly, but only because more people are dropping out of the labor force. Beyond that, inflation-the Fed Hawks’ favorite boogeyman– has slipped down to a 1.2% pace, well below the Fed’s 2% target.

Read the rest of it to understand just how unlikely we are to grow enough for the Fed to put a taper in place, and then be sure to read Makin’s explanation from two weeks ago about how we’re more likely to see another round of qualitative easing than a taper.

Essentially, the Fed is stuck in this cycle because the economic policies in place are depressing growth by penalizing capital and dumping more and more costs on business. Until that changes, the Fed will only have one tool in its toolbox, and every time they hint at putting it away, the conditions will worsen and require them to retreat.  We are on a path for a decade-long stagnation — or perhaps even longer — unless American economic, regulatory, and tax policies change dramatically first.


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The Feds are just propping up dear leader to make it past the 2014 elections…..

redguy on September 19, 2013 at 10:03 AM

We are on a path for a decade-long stagnation — or perhaps even longer — unless American economic, regulatory, and tax policies change dramatically first.

Obama policies – plain and simple. Liberal idiots cannot make the connection between the bad economy and who created it – Obama.

redguy on September 19, 2013 at 10:05 AM

unless American economic, regulatory, and tax policies change dramatically first.

That will require an enema of all democrats in Washington D.C. – until you end the corruption it won’t stop.

redguy on September 19, 2013 at 10:06 AM

Essentially, the Fed is stuck in this cycle because the economic policies in place are depressing growth by penalizing capital and dumping more and more costs on business. Until that changes, the Fed will only have one tool in its toolbox, and every time they hint at putting it away, the conditions will worsen and require them to retreat. We are on a path for a decade-long stagnation — or perhaps even longer — unless American economic, regulatory, and tax policies change dramatically first.

So we’ve become Japan? How long til we’re Greece?

Doughboy on September 19, 2013 at 10:08 AM

Just remember, every month they add 85 billion without value behind makes the inevitable inflation that much worse. These idiots think they can escape culpability when this collapses but that is not a certainty, just as due process might not be a certainty.

I have a feeling that people are not going to react politely to the elites having food and fuel when a loaf of bread costs $50 and gasoline is rationed to 25 gallons per month at $100 a gallon.

But whatever. What time is American Idol on?

platypus on September 19, 2013 at 10:10 AM

We are on a path for a decade-long stagnation — or perhaps even longer — unless American economic, regulatory, and tax policies change dramatically first.

What’s wrong with the policies we’ve got? The economy is booming according to the administration whenever the new unemployment or economic numbers are released. Do you mean they have been lying to us?

Happy Nomad on September 19, 2013 at 10:11 AM

Essentially, the Fed is stuck in this cycle because the economic policies in place are depressing growth by penalizing capital and dumping more and more costs on business. Until that changes, the Fed will only have one tool in its toolbox, and every time they hint at putting it away, the conditions will worsen and require them to retreat. We are on a path for a decade-long stagnation — or perhaps even longer — unless American economic, regulatory, and tax policies change dramatically first.

You know, I recall some crazy lady from Alaska predicting this over year ago. She’s so dumb.

Chris of Rights on September 19, 2013 at 10:11 AM

But, but, but GDP grew at 2.5% last quarter.

Oh wait, there’s one more revision to come.

Steve Eggleston on September 19, 2013 at 10:12 AM

How can this be? The Bush tax cuts are gone. We should be living in paradise any day now.

mankai on September 19, 2013 at 10:12 AM

The real reason why QE-Forever will continue – it’s keeping interest rates down and thus keeping the deficit under $1,000,000,000,000.

Steve Eggleston on September 19, 2013 at 10:13 AM

I have a feeling that people are not going to react politely to the elites having food and fuel when a loaf of bread costs $50 and gasoline is rationed to 25 gallons per month at $100 a gallon.

platypus on September 19, 2013 at 10:10 AM

Oh please! Stop being reactionary. The minimum wage will be at least $15/hour with free healthcare, phones, and WiFi. The people will be fine. You just hate it that a black is in the Presidency and delivering all this good stuff to the American people. /

Happy Nomad on September 19, 2013 at 10:14 AM

The Washington Post’s Ylan Mui points out that the US economy keeps missing its growth expectations, and the Fed didn’t have much choice.

Yes, the Fed doesn’t have much choice but to continue to drive growth down in this country with perpetual QE.

rickv404 on September 19, 2013 at 10:18 AM

Let’s see, $85 BILLION per month is being artificially pumped into the US economy for a paltry 2% annualized growth. That’s only $1.02 TRILLIOM to get that growth.

Go Obama/

Johnnyreb on September 19, 2013 at 10:18 AM

I have a feeling that people are not going to react politely to the elites having food and fuel when a loaf of bread costs $50 and gasoline is rationed to 25 gallons per month at $100 a gallon.

platypus on September 19, 2013 at 10:10 AM

Oh please! Stop being reactionary. The minimum wage will be at least $15/hour with free healthcare, phones, and WiFi. The people will be fine. You just hate it that a black is in the Presidency and delivering all this good stuff to the American people. /

Happy Nomad on September 19, 2013 at 10:14 AM

And the bread will be free. The meat needed to make a sandwich, however, will be $500/lb.

Steve Eggleston on September 19, 2013 at 10:19 AM

Happy Nomad on September 19, 2013 at 10:14 AM

I am so sorry for interfering with the meme. Where do I go to perform penance?

platypus on September 19, 2013 at 10:22 AM

BUSSSHHHH!!!!!

LOL the NYT comments. Blaming this due to 01-08. I kid you not. How soon they forget when places could not get enough bodies in the door to work.

Now your competing with 60 other people to flip burgers at the fast food joint.

watertown on September 19, 2013 at 10:22 AM

We’ll get off the heroin any day now. Just not today.

rbj on September 19, 2013 at 10:22 AM

We should be living in paradise any day now.

mankai on September 19, 2013 at 10:12 AM

It’s coming comrade. Just one more five-year-plan away. If you become impatient you could always travel to Tiraspol, Moldova, to get a glimpse of our glorious future.

Happy Nomad on September 19, 2013 at 10:23 AM

You know, this sounds quite a bit like addiction. The American economy is dependent upon the QE drug. And like most drug addictions, the effects decrease over time leaving the addicted in a worse and worse state.

Oh, and tapering rarely works for an addict either. The addict almost always has to go cold turkey.

Chris of Rights on September 19, 2013 at 10:23 AM

And the bread will be free. The meat needed to make a sandwich, however, will be $500/lb.

Steve Eggleston on September 19, 2013 at 10:19 AM

You’d better lay in a supply of rice and beans and the fuel to cook them. Oh, get some beano too. You’ll probably need it.

oldroy on September 19, 2013 at 10:24 AM

I am so sorry for interfering with the meme. Where do I go to perform penance?

platypus on September 19, 2013 at 10:22 AM

Detroit. You need to learn just how awesome our future is once dear leader’s policies have a few generations to mature. ;0

Happy Nomad on September 19, 2013 at 10:25 AM

Beano – quantitative easing for the new economy.

oldroy on September 19, 2013 at 10:26 AM

The USA flag will now be white in color with a red circle inside of it.

hillsoftx on September 19, 2013 at 10:29 AM

Let’s see, $85 BILLION per month is being artificially pumped into the US economy for a paltry 2% annualized growth. That’s only $1.02 TRILLIOM to get that growth.

Go Obama/

Johnnyreb on September 19, 2013 at 10:18 AM

To “unconflate” nominal (current-dollar) and “inflation”-adjusted (“constant”-dollar) numbers, the 1.26% annualized “real” GDP growth since the start of QE-Forever at the end of the 3rd quarter of 2012 translates into $248 billion of nominal GDP growth. Meanwhile, the Federal Reserve pumped $675 billion into the economy via QE-Forever between October and June.

You do the math.

Steve Eggleston on September 19, 2013 at 10:29 AM

I would probably be doing the exact same thing Bernanke is doing in order to prevent the US economy from tanking.

blink on September 19, 2013 at 10:22 AM

I sure as hell wouldn’t. What you call tanking, I would call economic correction. We need to stop feeding the addict and start in on the long process of re-hab which includes massive cuts to public spending and entitlement programs. The only reasons why we have this generational stagnation are the bad public policy in place that dis-incentivizes private captial and massive wealth redistribution by the state.

Happy Nomad on September 19, 2013 at 10:29 AM

The USA flag will now be white in color with a red circle inside of it.

hillsoftx on September 19, 2013 at 10:29 AM

Circle, crescent; what difference, at this point, does it make?

Steve Eggleston on September 19, 2013 at 10:30 AM

This will result in the end of the dollar as world’s reserve currency. You make more of something out of thin air, with no production behind it, you devalue each unit. And it is an admission by the Fed that when you only have a hammer (QE) everything looks like a nail. They have no other tool.

65droptop on September 19, 2013 at 10:32 AM

And they can’t blame Bush. The fiscal crisis was fixed after TARP I. TARP II and the stimulus were completely unnecessary. Obamacare, out-of-control spending, and burdensome regulations have crippled the recovery. We would be sitting pretty if Obama has simply done NOTHING.

blink on September 19, 2013 at 10:28 AM

The original TARP was not necessary either.

It was sold on the premise that society would collapse if we didn’t bail out institutions that behaved recklessly.

Government often spreads fear so it can provide a “solution”. The solution ends up being worse.

Nothing would have happened expect the people who caused this would have learned their lesson.

tetriskid on September 19, 2013 at 10:33 AM

The media has for as long as I can remember played the news to give the illusion Democrats run a better economy than Republicans. What’s the opinion here? Will they spin this to where when we get ten, fifteen years down the road they’ll still be painting this fiasco as a recovery under Obama? Or will they spin it to blame the recession at the beginning of his first term was too much for one man to deal with?

smoothsailing on September 19, 2013 at 10:33 AM

Obama has the best economic recovery since the great depression
-lefty posters on other websites

No lie….. Unstinkingbelievable

cmsinaz on September 19, 2013 at 10:38 AM

We would be sitting pretty if Obama has simply done NOTHING.

blink on September 19, 2013 at 10:28 AM

I’m really starting to think that would be the ideal President.

Q: What will you do once elected?

A: Absolutely nothing. Or as close to it as I can get. You won’t see me on TV unless there’s a national crisis. I won’t tour the world glad-handing other politicos. Wherever possible, I’ll leave that to the State department. I won’t even go to Congress to deliver a State of the Union address. I’ll have one typed up and hand-delivered to the Speaker and President of the Senate, as we used to do. If Congress passes some legislation, I’ll spend the 10 days I’m allotted to review it properly, and then I’ll sign it or veto it based upon my best judgment. There will be no signing statements. If Congress fails to perform their Constitutionally mandated duties I will work behind the scenes to get them moving, but I won’t get on national TV to harangue the Speaker of the House (or the Supreme Court, for that matter). If there’s a Supreme Court vacancy, the White House will submit a letter in writing to the Senate detailing my selection for the replacement Justice. My goal will be for you to forget as much as possible that I even exist.

Thank you. And please vote for me in November.

Chris of Rights on September 19, 2013 at 10:39 AM

Forward!

visions on September 19, 2013 at 10:44 AM

So we’ve become Japan? How long til we’re Greece?

Doughboy on September 19, 2013 at 10:08 AM

We’ll bypass all the PIIGS. Our next stop is Weimar.

clear ether

eon

eon on September 19, 2013 at 10:48 AM

And the bread will be free. The meat needed to make a sandwich, however, will be $500/lb.

Steve Eggleston on September 19, 2013 at 10:19 AM

Screw the bread and meat. Just eat your cake.

WryTrvllr on September 19, 2013 at 10:49 AM

Screw the bread and meat. Just eat your cake.

WryTrvllr on September 19, 2013 at 10:49 AM

Cake is for Frogs. Besides, Mrs. SCOAMT says there’s too much sugar in cake.

Steve Eggleston on September 19, 2013 at 10:51 AM

http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2013/09/20130918_emp.jpg

Notice something in this graph? I do. I notice recessionary cliffs followed by rather rapid growth. Momentary valleys amongst almost constant growth – except for the most recent…

Wonder what could have caused this…
HRRRMMMMMMM

Defenestratus on September 19, 2013 at 10:51 AM

Cake is for Frogs. Besides, Mrs. SCOAMT says there’s too much sugar in cake.

Steve Eggleston on September 19, 2013 at 10:51 AM

Well that just means there’s MORE CAKE for everyone when we use sucralose instead! Have a twinkie and stop your bellyaching.

WryTrvllr on September 19, 2013 at 10:57 AM

All summer, Federal Reserve officials said flattering things about the economy’s performance: how strong it looked, how well it was recovering, how eager they were to step back and watch it walk on its own.

Presidential election.

portlandon on September 19, 2013 at 11:01 AM

How long would any of you continue to ‘prime a pump’ before you conclude that the pump is broken?

slickwillie2001 on September 19, 2013 at 11:02 AM

The Fed’s chairman, Ben S. Bernanke, emphasized that economic conditions were improving. But he said that the Fed still feared a turn for the worse.

So I guess he’s saying that all of King Barry’s recent chest-thumping about the economy was all lies?

GarandFan on September 19, 2013 at 11:05 AM

The cure causes worse symptoms than the disease it seems.

This is most assuredly driving bubbles throughout the nation, and there will be no point at which they will be able to taper without destroying vast amounts of wealth that savers have accumulated.

So long as they keep underwriting the profit of the large banks, funds and businesses, those businesses will not drive any factual rebound.

astonerii on September 19, 2013 at 11:08 AM

Peter Schiff is right – the central banks cannot stop. It has to go on until destruction of fiat currency is achieved.

perries on September 19, 2013 at 11:11 AM

Yes, and ALL of this blame lays squarely on the federal government – not the federal reserve.

blink on September 19, 2013 at 10:48 AM

You say that as if there is a difference. And, of course, technically there is. But I say to you different President and we would not be looking at the commie that is about to become the next chaircritter.

Happy Nomad on September 19, 2013 at 11:14 AM

Btw, have you seen what’s going on in Australia with the new government? Within days they have gutted the incredibly huge environmental bureaucracy that had been created over the years.

blink on September 19, 2013 at 11:00 AM

All the Opposition can do in response is claim over and over how “petty” the new ruling party is these days. Love it…

Wanderlust on September 19, 2013 at 11:15 AM

The firearms industry is doing great, wonder why that is?

Bishop on September 19, 2013 at 11:18 AM

Except that the next President needs to put quite a bit of effort into undoing all the stupid things Obama has done.

Btw, have you seen what’s going on in Australia with the new government? Within days they have gutted the incredibly huge environmental bureaucracy that had been created over the years.

blink on September 19, 2013 at 11:00 AM

Assuming there’s a Paul Volcker (circa 1981) in our future to fix the damage, that is. That fixing is going to hurt, and hurt more the longer QE-Forever goes on.

Steve Eggleston on September 19, 2013 at 11:30 AM

Btw, have you seen what’s going on in Australia with the new government? Within days they have gutted the incredibly huge environmental bureaucracy that had been created over the years.

blink on September 19, 2013 at 11:00 AM

Too bad The Entity Formerly Known As The GOP didn’t have those kind of gumballs when they had the chance. Instead, they collaborated with The Swimmer to sink the feral claws further into education and rammed home Medicare Part D.

Steve Eggleston on September 19, 2013 at 11:32 AM

As an owner of a real estate title company I saw this coming.

This summer, Bernanke and Obama’s comments on QE and housing GSEs, respectively, within a week of each other, not only caused one of the three fastest spikes in mortgage rates in US history, it also caused an initial 40% dump in business, a slight recovery in sales by those who wanted to get in before rates went even higher, following now by stagnation.

Some competitors already prepared for layoffs or pulled ads for hiring. I just held firm expecting that the gov’t's (once again) crashing of the housing market with their inability to STFU and once again speculating on policy without any actual plan but scaring the hell out of the markets by their talk – not theory or consideration but plan – (3rd time they have crashed it and 2 times they’ve stopped accelerating RE market recovery since 2008 because of their inability to STFU by my count), would force the fed to back track, continue bond purchasing and drive the mortgage rates back down to where they were. And here we are.

Before Bush even left office I proposed an Executive Order titled the STFU Until You Have An Actual Plan Order which would prohibit federal bureaucrats and employees of the fed from opening their pie holes and thinking out loud to the media about stuff that would freak out the markets. The proposal is even more germane to the Obama’s administration cycle of stupid – see “red lines” set off the cuff for one example.

deepdiver on September 19, 2013 at 11:53 AM

der Führer reacts to Bernake’s no taper decision…

http://captiongenerator.com/7238/Hitler-Reacts-to-the-FED-Taper-Decision

Viator on September 19, 2013 at 12:28 PM

I think Bernanke would be great at contracting our monetary supply IF we elected a true fiscal conservative as President. An otherwise roaring economy would need to be tapered back to reasonable, steady growth (3% would be nice), but I don’t think it needs to be painful at all.

blink on September 19, 2013 at 12:06 PM

I don’t see any evidence he would. Besides, he won’t be there much longer.

If the entirety of the $85 billion/month in QE-Forever is real, then it’s already quite painful. Without it, nominal GDP would have contracted $363 billion (note – I somehow counted nominal GDP growth from 2012Q4 above instead of 2012Q3).

Steve Eggleston on September 19, 2013 at 12:41 PM

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” – Henry Ford

Murphy9 on September 19, 2013 at 12:54 PM

This is almost too funny to comment on. GROWTH…what growth…you mean in the number of employees we have to support through taxes for the Federal Government. Or…maybe all those Illegals that we are supporting that have crossed our borders…there is growth. Perhaps it is Obama’s ego…that has grown…OMG.

Carolynr on September 19, 2013 at 12:59 PM

We are on a path for a decade-long stagnation — or perhaps even longer — unless American economic, regulatory, and tax policies change dramatically first.


This is overly optimistic and false to fact.

The Federal Reserve is working hand in hand with the Obama Administration (the obedient servants of the 1%) to insure the TBTF banks NEVER have to face reality.

The individual propagandizing, “TARP I was much better than what would have occurred.” has ignored the FACT that TARP was sold as a Resolution Trust type of solution (research S&L crisis) but was instead used to make sure the banks that created the problem were paid full value for ridiculously stupid investment practices.

There are many on here who take exception to the term, Let.It.Burn

Yesterday, the Federal Reserve committed the United States to that EXACT policy.

Key points:

1) Having prepared the markets for the past 3 months for tapering to begin – the Fed “chickened out and lost its nerve” – Where have we seen this behavior before – in just the last two weeks?

2) The TBTF banks are ALL bankrupt. If you believe anything else, you don’t know accounting, much less economics. American corporations are ALL still exempt from “mark to market”. Every American publicly held company not following “mark to market” valuation of assets is publishing fantasy – not financial statements.

3) “QE Forever” has the effect of devaluing the dollar and pushing inflation ONTO our trading partners – who in turn can only try to devalue their currencies to keep inflation from destroying their economies. This makes “QE Forever” VERY UNPOPULAR with our trading partners – which is the rest of the world.

4) Our trading partners have a solution for “QE Forever”. They have been working on it for the last 3 – 4 years. All of our major trading partners have negotiated direct currency exchange agreements for the settlement of trade accounts. That phrase is in bold because it is the most dangerous situation the United States has faced since World War II – it means our trading partners are ALREADY positioned to STOP using the USD as the world reserve currency.

All international trade accounts are converted into US dollars for settlement. This DRIVES demand for U.S. Dollar and USD instruments (like the U.S. Treasurys) worldwide.

What happens when our major trading partners DROP the USD as the world reserve currency?

a) The ability of America to push inflation off onto our trading partners DISAPPEARS.

b) The U.S. currency currently held by central banks and companies around the world dramatically DROPS in value.

WHEN this happens (it is no longer an “if”), the Weimar Republic is going to look like a picnic by comparison.

Everyone on here talks about “Low Information Voters” and the problems they have caused.

The REAL problem is the “Low Information Leaders” in the Obama Administation and the Federal Reserve who have NO real business world experience but have been making disastrous policy decisions for the last 5 years.

PolAgnostic on September 19, 2013 at 1:36 PM

Instead of buying up debt at historical rates every month, why not just pay it off with the same funny money?

Bananas, anyone?

BKeyser on September 19, 2013 at 2:32 PM

This is almost too funny to comment on. GROWTH…what growth…you mean in the number of employees we have to support through taxes for the Federal Government. Or…maybe all those Illegals that we are supporting that have crossed our borders…there is growth. Perhaps it is Obama’s ego…that has grown…OMG.

Carolynr on September 19, 2013 at 12:59 PM

…there you go!

KOOLAID2 on September 19, 2013 at 11:01 PM