(MENAFN- Arab Times) Economists and market analysts on Thursday blasted Federal Reserve chief Ben Bernanke after the Fed stunned markets with its unexpected decision to not cut its stimulus. Bernanke came under fire for having stoked nearly unanimous expectations that the Fed would announce the "taper" of its $85 billion a month bond-buying program after its policy meeting Wednesday.
The decision cost investors who bet on a stimulus cutback hugely, though benefiting many with long positions in global stocks. Many blamed Bernanke and fellow members of the Federal Open Market Committee (FOMC) for having since May repeatedly suggested a September taper of the quantitative easing (QE) program. University of Michigan economist Justin Wolfers called the surprise "the result of a needless miscommunication. "This whole taper debate is one that should never have happened," he wrote.
After Bernanke first spoke of a stimulus cut in May and June, "taper-talk came to dominate the financial headlines, and a monetary meme was quickly born. The result... was that markets over-reacted," he said. "Despite Bernanke's effort yesterday in the press conference to paint the FOMC decision as entirely consistent with earlier communication from the FOMC, it was not," said Chris Low at FTN Financial.
"The Fed may have done the right thing for the economy... but the Fed's communications credibility is shredded." Speaking after the FOMC announced its decision, Bernanke argued that all along he has stressed that any decision to taper had to be backed by data showing steady gains in the economy, especially "continued improvements in the labor market." "I think there's no alternative in making monetary policy but to communicate as clearly as possible, and that's what we try to do," he said.
But Bernanke had not just pointed to a taper beginning late this year. The explicit details he provided fed the consensus that cuts were imminent. He said that QE should be wound up when unemployment falls to 7 percent, with the expectation that that will happen by mid-2014. FOMC members repeated those details in speeches, some emphasizing "as early as September." When the unemployment rate fell in August to 7.3 percent, not far from the threshold and with no caution from the Fed, the die was cast, as far as markets were concerned. But the result was that interest rates shot up in expectation of tighter money conditions, apparently impacting economic activity, including home buying, something that Bernanke referred to when explaining the non-taper decision. "The irony to all of this is that the backup in interest rates was due mainly to the chairman's May 22 comments," said economist Joseph LaVorgna of Deutsche Bank. He questioned whether financial conditions have really tightened, but added: "If the Fed believes they did tighten, why did not the chairman or another Fed governor attempt to communicate this at some point" to prevent markets from getting ahead of policy?
"We are worried that when the time comes to taper, and someday tighten, the Fed will not have the courage to follow-through on its actions because market expectations will likely be well ahead of where the Fed is. " Many analysts still praised the decision itself, saying persistent weaknesses in the economy, and with a turbulent battle over government budgeting and debt ahead, require continued stimulus. "The economy has not pulled away from its near two percent trend growth rate of recent years," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
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WASHINGTON: Unemployment rose in 18 US states last month as many reported cutting jobs. Weaker hiring across states could add to worries about the tepid job market. The Labor Department says unemployment rates fell in 17 state states and were unchanged in 15. Employers added jobs in 29 states, the fewest since March. And 20 states reported job losses, the most since March. Louisiana added 14,000 jobs, while Nevada's payrolls increased by 11,200 positions. Still, Nevada's unemployment rate remained 9.5 percent, the highest in the nation. And Louisiana's was unchanged at 7 percent. Illinois had the second-highest rate at 9.2 percent. North Dakota reported the lowest rate, at 3 percent.
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