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Saturday, January 04, 2014 8:07 PM

Fed Admits It's Clueless How QE Works; Radical Suggestion

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Inquiring minds are investigating three articles from today, stating opinions of three different Fed governors.

Boston Fed President Against Tapering

Boston Fed President Eric Rosengren says Rapid QE withdrawal could permanently harm U.S. workers

A dovish U.S. central banker on Saturday again urged the Federal Reserve to be patient as it trims its support for the economy, in part because it risks permanent damage to the labor market.

Boston Fed President Eric Rosengren dissented against the central bank's landmark decision last month to reduce its bond-buying program by $10 billion to $75 billion in purchases per month. In a speech here, he repeated it was a mistake because unemployment remains too high and inflation too low.

"Policymakers have the opportunity to be patient in removing accommodation, speeding up the process of achieving both elements of the Fed's dual mandate" of maximum sustainable employment and inflation of around 2 percent, he said.
Plosser at Odds with Yellen's Approach

Yahoo!Finance reports Fed's Plosser at odds with policy approach favored by Yellen.
The Great Recession could have done permanent damage to potential U.S. output, a top Federal Reserve official said on Saturday, taking an indirect shot at more cyclical approaches to policy-making that is favored by many economists, including the next Fed chair.

Philadelphia Fed President Charles Plosser said in a speech he is skeptical of so-called "optimal control" approaches to monetary policy in which mathematical models are used to predict when things like unemployment and economic growth will return to more normal levels.

Fed Vice Chair Janet Yellen, who is set to take the reins at the U.S. central bank next month, has often touted this approach, including tolerating higher inflation for a short time in order to speed up the overall economic recovery.
Dudley Admits He's Unclear How QE Works

Rounding out our trio of articles from today, please consider Still unclear exactly how QE eases conditions: Fed's Dudley.
Extensive research into massive asset-purchase programs has not yet clarified whether such policies ease financial conditions primarily as a signal to investors or more directly through private portfolios, an influential U.S. central banker said on Saturday.

"We still don't have well-developed macro-models that incorporate a realistic financial sector,' William Dudley, president of the New York Fed, told an economics conference.

"We don't understand fully how large-scale asset purchase programs work to ease financial market conditions, there's still a lot of debate ..." he said. "Is it the effect of the purchases on the portfolios of private investors, or alternatively is the major channel one of signaling?"
Radical Suggestion

While these Fed governors are grasping at straws in a tornado bickering over whether to taper or not, let me propose a simple idea: The Fed cannot figure out how QE works because QE doesn't work. Two decades of Japanese QE is sufficient  proof.

In the US, the Fed did ignite massive stock and bond market bubbles, but who in their right mind thinks bubbles are a measure of success?

All of the Fed's modeling is nothing more than a chasing one's tail exercise of economic stupidity. 

Simply put, the Fed is nothing more than a bunch of Soviet-style central planners with inflated opinions about what they can or cannot do.

If the Fed came out tomorrow and stated it would set the price of orange juice, everyone would think the Fed was insane. And they would be correct.

Yet amazingly, people think the Fed can set the correct interest rate policy and the correct monetary easing policy, not only to control the proper amount of inflation, but to manage unemployment as well, even though the central planners themselves readily admit they are clueless as to how their policies even work!

If that's not a bubble belief in wizard fools, what is?

Mike "Mish" Shedlock

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