Martin Feldstein: The Fed Should Start to 'Taper' Now
Comment of the Day

July 02 2013

Commentary by David Fuller

Martin Feldstein: The Fed Should Start to 'Taper' Now

Here is the opening from this interesting and important article, published by The Wall Street Journal (subscription registration required to read the full article, PDF also provided)
The Federal Reserve should begin now to end its program of long-term asset purchases. It should not wait for the improved labor market that it predicts will come later this year, an improvement that is unlikely to occur. Instead, the Fed should emphasize that the pace of quantitative easing must adjust to the likely effectiveness of the program itself, and to the costs and risks of continuing to buy large quantities of bonds.

Although the economy is weak, experience shows that further bond-buying will have little effect on economic growth and employment. Meanwhile, low interest rates are generating excessive risk-taking by banks and other financial investors. These risks could have serious adverse effects on bank capital and the value of pension funds. In Fed Chairman Ben Bernanke's terms, the efficacy of quantitative easing is low and the costs and risks are substantial.

At his June 19 press conference, Mr. Bernanke described the Fed's plan to start reducing the pace of bond-buying later this year and to end purchases by the middle of 2014. He stressed that those actions are conditional on a substantial improvement in the labor market, leading to an unemployment rate of about 7% by mid-2014 with solid economic growth supporting further job gains. He emphasized that the "substantial improvement" would be judged by more than the unemployment rate.

Over the past year, unemployment has declined to 7.6% from 8.2%. However, there has been no increase in the ratio of employment to population, no decline in the teenage unemployment rate, and virtually no increase in the real average weekly earnings of those who are employed. The decline in the number of people in the labor force in the past 12 months actually exceeded the decline in the number of unemployed.

David Fuller's view I agree that Mr Bernanke or his successor will have to abandon his 6.5% unemployment rate target for withdrawing quantitative easing (QE). This figure is unlikely to be reached anytime soon for the following reasons: 1) GDP growth is slow; 2) Corporations may not find the skills they require among the USA's unemployed; 3) The big multinationals (Autonomies) may prefer to hire workers closer to their overseas markets; 4) An accelerating rate of technological innovation is replacing some blue and white collar jobs more quickly than they can be replaced, and this trend is more likely to increase than decrease over the medium to longer term.

I commend the rest of Martin Feldstein's article to you. It makes a number of good points with which I agree. These are likely to cause some more market turbulence over the short to medium term as Fullermoney has been saying in recent months.

Nevertheless, I maintain that the USA is in a comparatively strong position: 1) Thanks to its advantage in energy costs among large, developed nations, having invented and utilised gas and oil fracking technology; 2) The USA's overall lead in technological innovation has actually increased in recent years; 3) The USA has more corporate Autonomies than any other country, making it the most established global competitor.

On the negative side and despite the paragraph above, the USA still has budget and trade deficits, high corporate taxes, and a government that appears more interested in wealth redistribution than wealth creation. There is also a possibility that the US Dollar will appreciate more than many American companies would like to see.

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