In an announcement that surprised many analysts—but not Currency Wars author James Rickards—the Federal Open Market Committee (FOMC) announced that the policy of purchasing $85 billion in securities per month will continue unabated. This means quantitative easing goes on and easy money abounds. Markets predictably lapped this news up, with the Dow Jones Industrial average up 147 points by the day’s closing.
The ostensible impetus for the taper is a “tightening of financial conditions observed in recent months” which the FOMC partially attributed to the sequester. Some, such as Bill Gross of Pimco, would argue that this is more likely a step taken in advance of the very likely nomination of Janet Yellen to succeed Ben Bernanke as Fed chair. Yellen would almost assuredly continue the low-interest rates and pro-stimulus policy which characterizes Fed action today, so this announcement may have been designed to help establish continuity. Analysts had been predicting a slight pullback from bond-buying.
Some remain critical of central banking, regardless of whether it’s Bernanke or Yellen calling the shots. Reagan-era OMB director David Stockman was livid in a Bloomberg interview, saying that “we’re gonna basically replace ‘Bubbles Ben’ with ‘Calamity Janet.’” Yellen, says Stockman, has “no clue how to wean Wall Street from its massive addiction” to easy money policies because she is someone “who spent her whole life as a monetary bureaucrat in the Fed system” who believes that the “entire system has to be run by a monetary politburo turning all the dials.”
On a psychological level it is probably unsurprising that central bankers would be reluctant to cut back on the stimulus. The most touted of the Fed’s responsibilities are to moderate inflation and attain full employment. Influenced as all of them are by the germ of Keynesianism and the power of central banking, it seems natural to expect that Bernanke, et. al., would become skittish if there was even the slightest sign that unemployment wasn’t going anywhere near their target. In the event that Bernanke resigns and the chair goes to Yellen, who has said that even if unemployment hits a 6.5 percent target she is not sure that the Fed would hike rates and openly revealed that fighting unemployment is her biggest preoccupation at the Fed, many announcements such as this one are likely to emerge from FOMC meetings.