David Beckworth Former Fed Governor Randall Quarles recently asked why the Fed didn’t move last fall to stop inflation. Here’s how Quarles responded:
Quarrel: This may be a strange belief. I don’t think that’s shared publicly or widely at the FOMC. But I believe it’s a separate element of the Fed’s creed that doesn’t necessarily lead to a recession, and it becomes clear that it’s time to pivot to easing housing, and it’s a long-term kind of Fed policy that you should’t be on the gas and the brakes at the same time. steps; This means that you should not raise interest rates at the same time as you are still increasing the size of the balance sheet. And so we decided that we had to reduce our balance sheet purchases. The lesson of the taper tantrum under Bernanke was that you had to telegraph in advance. You have to do it slowly to avoid market disruption. And you have to complete it before you start raising interest rates so you don’t do two contradictory things. So that was the sequencing.
Macroeconomics is full of myths. There is a widely held (false) belief that the United States ran unusually large budget deficits in the 1960s and that the high inflation of the 1970s was caused by supply shocks. Another popular myth is the idea that there was a “taper tantrum” in 2013 that seemed to “disrupt the market.” Where is the evidence for that claim?
FWIW, here’s the S&P500 in the year after Bernanke’s May 22, 2013, speech on the need to finally taper bond purchases (a rather obvious point, BTW):
Note that the speech did not cause any turmoil in the stock market either immediately or in the next 12 months. Nor was there any major market reaction to Bernanke’s speech in the bond market, although long-term rates trended upward in late 2013 due to a stronger-than-expected economy. .)
Quarles suggests that in the fall of 2021, the Fed responds to this false “lesson” by doing nothing to control inflation. Today, pessimistic stock and bond market participants must be saying “thanks for doing nothing,” as the Fed’s inaction leads to market outrage in 2022, the economy spirals into hyperinflation, and stock and bond prices plummet:
I say, the Fed should not focus on stabilizing financial markets; They should focus on stabilizing the expected NGDP growth. Stable financial markets cannot be artificially created; They result in stability in the broader economy.
The Fed should keep its eye on the ball: