Tags: Fed | QE | story | markets

Fed Policy Now Less Important Than the Story Policymakers Tell

By    |   Friday, 21 Feb 2014 10:24 AM

President Obama has gotten many things wrong in the past few years, but investors should pay attention to one thing he understands very well — stories can be more important than policy is.

While campaigning for his second term, Obama said, "The mistake of my first term — couple of years — was thinking that this job was just about getting the policy right. And that's important, but, you know, the nature of this office is also to tell a story to the American people that gives them a sense of unity and purpose and optimism, especially during tough times."

The Federal Reserve understands telling a story is more important than getting the policy right is. Quantitative easing (QE) has been an experiment. When the Fed started experimenting with printing trillions of dollars, they had no data to show them what to expect. They also had no way of knowing how the markets or the economy would react to the policy.

To overcome the lack of data, the Fed told everyone QE would help lower unemployment without causing inflation. They have stuck to their story, and the markets have responded favorably even as the economy failed to recover. If traders begin to doubt the Fed's story, stock prices could fall and commodities could rise as inflation accelerates.

Many economists wonder how the Fed will remove trillions of dollars from the money supply when inflationary pressures appear. For now, the Fed's story is that they have a plan. If the Fed loses control of the story, traders are likely to sell stocks and buy gold, just like they have in the past when inflation picks up.

It seems unlikely the Fed can make everyone believe a story that ignores economic theory about money supply for much longer. When the Fed's story starts to unravel, expect volatile markets and yet another bear market in stocks.

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MichaelCarr
President Obama has gotten many things wrong in the past few years, but investors should pay attention to one thing he understands very well — stories can be more important than policy is.
Fed,QE,story,markets
310
2014-24-21
Friday, 21 Feb 2014 10:24 AM
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