We explained yesterday how Bernanke's actions had left the Fed's "credibility in tatters," and further the double-bind that they are stuck with. Following Bullard's comments earlier that a Taper decision is close, Esther George (admittedly a hawk) has come out fighting. Warning that the Fed "risks confusing the message on when it will taper versus end QE3," she cites lower unemployment and "sufficiently positive data" to warrant a reduced pace of QE. But here concluding remarks are key:
- GEORGE: FED WILL NEED CREDIBILITY, CLEAR COMMUNICATIONS TO ASK MARKETS TO TRUST ITS FORWARD GUIDANCE
- GEORGE: FED CREATED CONFUSION, DISCONNECT WITH MARKET EXPECTATIONS ON QE
- FED'S GEORGE: 'COSTLY STEPS' WERE TAKEN, INCLUDING FED COMMUNICATIONS, TO PREPARE MARKETS FOR CHANGE TO QE3
Crucially though, and perhaps explaining why they decided not to taper, she explains that "sometimes the markets get it wrong; FOMC cannot let markets dictate policy." So there it is - the Fed decided the consensus was too large and decided to 'spank' investors by smashing stocks higher.