Thursday, November 21, 2013

QE & the Deficit (excerpt)

To taper QE, or not to taper QE? That is the question. Another question is why haven’t the members of the FOMC considered tying QE tapering to the tapering of the federal deficit? Over the past 12 months through October, the federal deficit has totaled $652 billion, or $54 billion per month on average. That’s down from the $88 billion per month average during December 2012, when the FOMC decided to purchase $45 billion per month in US Treasuries.

Given that the federal deficit has narrowed by about 40% since last December, why not taper Treasury purchases by the same amount to $27 billion per month? That would be a credible, obvious, and easy way to sell tapering. Instead, Fed officials are subjecting us to their tiresome dramatics over an initial tapering that probably won’t be any bigger than $10 billion to $15 billion per month.

It would make sense for the FOMC to taper QE purchases of Treasuries as the federal deficit narrows. However, Fed officials don’t want to admit that QE amounts to monetizing the federal debt. They prefer to say that they are striving to achieve the mandate of full employment and low inflation set for them by Congress.

Today's Morning Briefing: Hamlets. (1) The show must go on and on. (2) Bullard’s performance. (3) QE is a “booster rocket.” (4) No “obvious” bubbles. (5) Negative interest rates might be in fashion this winter. (6) Fathoming the unfathomable QE exit mess. (7) Lots of QE-or-not-QE questions. (8) Why not tie QE tapering to tapering of the federal deficit? (9) Hamlet on earnings and revenues. (More for subscribers.)

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