I can't help but wonder, if the Fed could do it all over again, would they have gone as deep into QE?
"Data dependent" is the Fed, or so they say. Their decision as to when to start (and by how much) the taper will depend upon the economic data. In theory, they won't cut until the economy begins gaining traction. But here's the thing---Bernanke's counterfactuals notwithstanding---QE doesn't seem to be having much of an economic impact. And the more they do, the more, I'm certain, they worry about asset bubbles. And if an asset bubble happens to burst against a full-bore QE program and the zero lower bound (short-term interest rates), and inspires the next recession, what then?
In a Bloomberg interview yesterday, Fed governor Dennis Lockhart stressed the importance of signaling to the financial markets their intent going forward---so as to not spark a reactionary spike in long bond yields and a sell-off in the stock market. A couple problems with that: One, as the members descend onto their respective speaking circuits, they signal to the market just how much they disagree with one another. Fisher wants to begin reducing QE in December, Lockhart says it'll be on the table, but, clearly, he's a no vote on any near-term taper. And two, it seems that every time a member signals a potential taper-date, the market recoils (yesterday, Fisher hinted December, and, as I type [early morning] the Dow future contract is pointing to an 80 point decline at the open).
And, now, to add insult to injury, there's a growing populace view that the Fed's efforts have accomplished virtually nothing, other than a widening of the gulf separating the rich (the holders of assets) and the not-rich. Not the loveliest political position to find yourself in these days.
Speaking of injury, do you remember the time you left that band-aid on your leg for too long? The cut had healed and your hairs were growing back. You knew that peeling it off slowly would only extend the pain. So you closed your eyes, held your breath, and ripped the sucker off. And it hurt like hell for a minute. Well, the Fed has done its darnedest to bandage up the wounded U.S. economy. Adding layer upon layer as if more bandaging would somehow lead to faster healing. It's finally gotten to the point where the dressing has grown so thick that we've lost sight of the healing process. And, worst of all, it may have woven itself into the skin to a point where removing it---all at once or slowly---may take a good chunk of flesh with it.
Having taken monetary policy to this extreme, the Fed has to be feeling boxed in. They're dying to taper, but they're praying that if they wait long enough the economy will somehow toughen and separate itself from the bandage, allowing them to peel it back without causing any bleeding. I say hmm...