The bottom line is that the current zero interest rate policy (ZIRP) and the various quantitative easings will be dismantled and undone as slowly and deliberately as they were put on. We’ll not be thrown down face-first atop a wooden table, ravished and thrusted upon by coarse soldiers as a sentry guards the door. No, after all this time I believe that our corset shall be untied gingerly and with care, our hips caressed and our neck dappled with an archipelago of gentle kisses. Bernanke is nothing if not a patient lover, subtle almost to a fault.
To be positioning our portfolios for anything else, regardless of misinterpreted signals, would be to act against all of the evidence we have.
The above is from a fairly well-trafficked post I did at Forbes this past May about what the wind-down of QE would look and feel like according to my best guesses.
The key, in my view, was that Bernanke was not about to be goaded into wrecking the economy just for the sake of “his legacy”. Many in the media and on Wall Street had expected a raping in the credit markets and the yield proxy sectors but I just didn’t see it that way.
Here was one of several points I tried to make:
7. The conditions under which the Fed does anything other than talk will presumably be better than the conditions of the recent past. This means a low 7%ish headline unemployment rate, a stabilization in the labor force participation rate (which may have already begun in April) and accelerating GDP growth. And not for one month or quarter, but for an enduring amount of time. The Fed has 250 PhDs running around analyzing this stuff, they have all the same timing concerns that we do.
Here is where Bernanke’s “Student of the Depression” merit badges come in handy – in the Spring of 1937, production, profits, and wages had returned to pre-1929 crash levels. FDR was then pushed by his councillors into tightening monetary policy – a decrease in deficit spending, a hike in reserve requirements for banks – which promptly led to the recession of 1937-38 or what economic historians refer to as “Roosevelt’s Recession”. As we have seen so far, Bernanke is not going to be pushed into repeating that mistake, even when gun-fetishizing, ignorant presidential candidates make physical threats against him – actual Rick Perry quote from last summer’s campaign trail: “If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas.” Nice, moron, have a can of beer.
The bottom line is that the Fed did what the Fed said the Fed would do. Unemployment is above the stated threshold and inflation is below – thus, no taper. Why is this so mystifying? Are we that untrusting of people’s word that we can’t take a single thing at face value anymore?