Quantitative Guilt

The Fed minutes highlighted a developing trend in the CB's ongoing policy of openness. When linked to interviews, speeches and reporter trial balloons after the meeting; there appears to be a  designed process of moving the discussion into the marketplace prior to the minutes release. The FOMC pointed to 3 specific concerns and a possible outcome, none now a surprise.

The Fed focused on 1) Financial stability 2) Exit complications 3) Inflation risk (their order) in what is now called Cost-Benefit Analysis of QE. Two quoted concerns are near and dear to us. The panel was worried that QE could "foster market behavior that could undermine stability" and/or "impact the functioning of particular [unnamed] financial markets." In other words, their attempt to micro-manage the economy through a command control marionette string might work.

The conclusion seemed to confirm our earlier analysis that QE3 is a "variable insurance policy" action. The Fed, "A number of participants felt the ongoing assessment of asset purchases might well lead (our emphasis) to TAPER or END QE3 before a substantial improvement in the labor market occurs." The impending budget sequester did not feature as prominently as we thought it might.

I would only add that the activity has already fostered behavior that will undermine stability, certainly if markets are faced with an exogenous event. Further, to the extent that the unnamed financial market is the term structure of rates, its function has already been heavily impacted. As Jenny Whitman said to her dad, Dave (played by Richard Dreyfus) in Down and Out in Beverly Hills, "Guilt sucks."



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