The Mystery of the Missing Taper

Taper Caper: Conspiracy Theory

Last Thursday, prior to the FOMC announcement, I was invited to come sit with another group of friends and traders everyone was sure there would be some type of tapering. That message had been clearly communicated to the markets. When the announcement came, the telephones went off and everyone erupted with various forms of surprise. I fully admit to being speechless. I kept waiting for some kind of explanation, and none came. The more we talked about it and the more I thought about it later, the more convinced I became that this was one of the more ham-handed policy announcements from the Fed in a very long time. Why would you go to the trouble of getting the market all ready for the onset of tapering, build expectations, and then jerk out the rug? What in the wide, wide world of sports is going on?

Everyone is searching for an answer on the FOMC’s move. Louis Gave came up with what I’m affectionately calling his conspiracy theory. He thinks Obama is quite upset that he can’t have Summers as Fed chair and that his staff is crossways with Yellen. Reports suggest she has not even been interviewed yet. Really? If that’s the case then perhaps Obama would rather stick with Bernanke for another two years and then make another try for Summers or maybe even a rested Geithner. Steve Cucchiaro (of $18.5 billion-under-management Windhaven fame) asked if Summers had maybe communicated through back channels to Bernanke that he wanted to end the tapering, and Bernanke was helping him out; but then when he was no longer in the running for Fed chair, Janet Yellen came and said, “Ben, I’m not ready to end tapering yet,” so Bernanke took one for the team.

I heard directly from another friend that he was in the offices of one of the world’s largest bond managers, and they had actually been at the Fed the previous week and were confident there would be a small tapering. Did you see the way bonds got ripped after the announcement? These bond managers were pissed (that’s a technical economics term). Can we trust the Fed now? Years of work building transparency and a confidence in the narrative, and then they blow it on a meaningless non-taper?

This week’s Has the FED Been “Politicized” or “Captured”? is from Ben Hunt. It echoes some of my own concerns about the Fed and raises others. Quoting:

Two things happened this week with the FOMC announcement and subsequent press conferences by Bernanke, Bullard, etc. – one procedural and one structural. The procedural event was the intentional injection of ambiguity into Fed communications…  The structural event … which is far more important, far more long-lasting, and just plain sad … is the culmination of the bureaucratic capture of the Federal Reserve, not by the banking industry which it regulates, but by academic economists and acolytes of government paternalism. These are true-believers in too-clever-by-half academic theories such as management of forward expectations and in the soft authoritarianism of Mandarin rule. They are certain that they have both a duty and an ability to regulate the global economy in the best interests of the rest of us poor benighted souls.

One of the important things the Federal Reserve provides when there is a crisis is that sense that “daddy’s home.”. Whether or not you personally believe the Fed has any significant power to actually do anything, the general market does believe it, and that’s the important thing. Now the Fed is at significant risk of damaging its reputation for decisiveness and clarity. We can only hope there is not another crisis coming out of Asia or Europe in the next few months that would require Federal Reserve action. What could they do now that would actually be credible? And while I don’t see a crisis developing in a short timeframe, it is the things that we don’t see, the Lions in the Grass, that create so many problems. Just saying…

Richard Fisher: Candor With A Capital C – Yet Again

One of the Fed speakers yesterday was the President of the Dallas Fed, Mr. Richard Fisher.  Mr. Fisher is a favorite of floor traders since, when he speaks, the message is clear, not couched in monetary argot.  He didn’t deviate from that habit at all yesterday.

His speech was on current banking trends and a post-Lehman review.  He said that too big to fail banks were “a dagger pointed at the heart of the economy.”  At the end of his speech he said:

A Deliberate Deflection

As I said at the beginning of my remarks, I am going to try to avoid answering questions you might have about last week’s FOMC meeting and what some in the press have now labeled “the taper caper.” Nearly every Federal Reserve Bank president and his or her sister will be speaking to this topic this week, so you will be getting an earful of cacophonous comments on this subject.

Today, I will simply say that I disagreed with the decision of the committee and argued against it. Here is a direct quote from the summation of my intervention at the table during the policy “go round” when Chairman [Ben] Bernanke called on me to speak on whether or not to taper: “Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question.” I believe that is exactly what has occurred, though I take no pleasure in saying so.

While he may have deflected further questioning on the “taper caper,” he did not deflect all questions.  Again his candor brought headlines.  Here’s a bit from Bloomberg on the Fed Chair succession:

“The White House has mishandled this terribly,” Fisher said today in response to a question from the audience after giving a speech in San Antonio, Texas. “This should not be a public debate,” he said, adding that the Fed “must never be a political instrument.”

On another question, Mr. Fisher apparently said that although Janet Yellen was dead wrong in her policy direction, she would make a great Chair.

We doubt that Mr. Fisher ever hears the question, “What exactly do you mean by that?”  We could use more such candor elsewhere.

You have yourself a good week, and I’ll report back. And now sit down while we hear from Ben Hunt.  See Has the FED Been “Politicized” or “Captured”?

Your wishing he knew what was going on in Bernanke’s head analyst,

John Mauldin, Editor
Outside the Box

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