Benn Steil


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Is the Fed Right to Calibrate Asset Purchases to Economic Data?

by Benn Steil and Dinah Walker
May 29, 2013


The Fed is trying to have its cake and eat it too. Having earlier tried to anchor market expectations of future low interest rates by pledging that policy would remain accommodative into 2015, Fed Chairman Ben Bernanke is now saying that the Fed will consider “a recalibration of the pace of its [asset] purchases . . . in light of incoming information.”

So what’s Mr. Market to do? Sleep tight and let the data do what the data will do, or pounce on data rumors to front-run the “recalibration”?

The Fed’s trying to fine-tune the pace of asset purchases is bound to give Mr. Market a bad case of the shakes, as “incoming information” has been extremely volatile throughout this economic recovery. As today’s Geo-Graphic shows, using the six-month average of employment gains to project the unemployment rate going forward suggests vastly different metrics of how close the Fed is to achieving its 6.5% unemployment-rate objective.

If the average pace of job gains in the six months leading up to and including the March unemployment report had been extrapolated forward, the Fed would have expected to reach its 6.5% unemployment target in August 2015. Yet with just one additional month of employment data, an extrapolation of the six-month average gain in employment through April shows the unemployment rate falling below the committee’s 6.5% threshold in August 2014, a full year earlier.

And the pattern over the past two months is not an anomaly. Using the six months of employment data available in November of last year, our projection had the Fed reaching its employment objective as soon as May 2014; but in January of this year, just two months after the November unemployment report, our projection doesn’t have the Fed reaching its objective until September 2015.

Asset purchases are not a precision tool, so the idea of continuously “recalibrating” them to volatile economic data is a particularly bad one. Recalibration is a strategy in need of recalibration.

Financial Times: Ben Bernanke Says Bond Buying Could Slow
Wall Street Journal: Fed Leaves Market Guessing
The Economist: Parsing the Federal Reserve
The Guardian: Markets Rally as Ben Bernanke Backs Further Quantitative Easing


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