In a note this week Nomura Research Institute’s famed chief economist Richard Koo laid out his case for the Fed to start tapering as soon as possible. Most of it focused on liquidity, recent labor market improvement, benign inflation, and the current pace of economic growth through his ever insightful balance sheet recession lens. Most of these factors have been debated to their fullest extent by every research team in finance, and with industrial production and CPI as the only significant data points left before the FOMC meeting, there is little to change any views from that angle.
What stuck out to me was his “personal standpoint” argument. This is especially worth noting because he recently met with both Bernanke and Yellen to discuss monetary policy and presented his case for normalizing policy. As an aside the aforementioned presentation, which I was lucky enough to see later in the month, included one of my favorite chart’s of the year.
Since I did not see any of the usual suspects write up his most recent note I have shared the relevant section directly below.
(A)n objective view of the situation suggests that now—when forward guidance is still in effect and inflation is subdued—is the time to act in order to prevent a premature rise in interest rates under tapering. For that reason, I suspect many FOMC members are arguing that now is the time to make the announcement.
December tapering would benefit both Bernanke and Yellen
A December tapering would also be beneficial from a personal standpoint for both the current Fed chairman and his successor nominee. As the man responsible for launching quantitative easing, Mr. Bernanke would no doubt like to set a course for the normalization of monetary policy before his term expires.
I suspect he began talking about tapering in May because he wanted to at least put things in motion before his term expired at the end of January. Then, even if the US economy fell into a quantitative easing “trap” during the process of normalizing policy, he would be able to avoid the criticism that he had started QE but left the cleanup to his successor.
Decision by Bernanke would make it easier for everyone else
Ms. Yellen, meanwhile, has strong dovish credentials, and if that was the basis for her nomination by the Obama administration, I think it would be difficult for her to announce a tapering immediately after becoming Fed chair.
For the first few months, at least, it would be better for her to spend time preparing everyone psychologically for the next step given her dovish reputation in the markets and the administration. But this would delay the start of tapering and could push the Fed behind the curve, possibly leading to an undesirable rise in long-term rates.
Her job, therefore, would be made much easier if Mr. Bernanke were able to set a new course for the Fed before stepping down.
In short, if a decision has to be made in the near future, it would be easier for all concerned if Mr. Bernanke were to make it before his term expires.
Dutch again: The parameters for policy normalization have been in place for some time now, and I agree that it is both important and would be far easier for Bernanke to make the call.