Caroline Baum at Bloomberg explains the Fed’s fuzzy messaging on the future of QE.
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First Baum lays waste the idea that the Fed can use predictive models as the basis for sound monetary policy.
At his March 20 press conference, Fed chief Ben Bernanke said “it makes more sense to have our policy variable,” with purchases that respond to changes in the outlook.
To him, perhaps. If I understand Bernanke, he is saying that every six weeks policy makers will examine an array of leading, coincident and lagging indicators, most of which are revised and subject to seasonal distortions, to take the economy’s pulse and reassess the forecast. From there, they will determine the appropriate amount of monthly bond purchases.
This idea is as infeasible in theory as it is in practice.
Unlike the physician who uses real-time feedback to adjust the dose of a patient’s medication, central banks operate in a world of long and variable lags. Their predictive models have a poor record. The continuation of QE has always been predicated on an improvement in “the outlook for the labor market,” rather than an improvement in the labor market per se. Call it a better jobs market once removed. The inherent flaws in the theory should be apparent.
She cites frequent revisions as once reason it is impossible for the Fed to accurately base its decisions on real-time data.
An example will serve to demonstrate why using real-time data to adjust QE is a fool’s errand. As initially reported by the Bureau of Labor Statistics, non-farm employment averaged 157,000 a month in the fourth quarter. Subsequent revisions raised the average to 209,000.
Last week, the Bureau of Economic Analysis uncovered an additional $108 billion (annualized) of personal income in the fourth quarter, which had to come from a larger workforce, higher compensation or some combination of the two. The revision was based on the Quarterly Census of Employment and Wages, an almost-universal tally of jobs and wages derived from tax reports submitted by employers.