The Fed was seduced by QE and cheap money, now it can never leave
It's appropriate that Ben Bernanke's successor came from California.
With QE you can stop buying any time you like, but you can never leave.
"Maybe this is one of those cases where you can't go home again," Bernanke wrote earlier this month, referring to the Fed planning to shrink its balance sheet back to pre-2008 levels.
The Fed won't hike rates tomorrow and the market is pricing a 50/50 shot that the Fed will sit on its hands through year end.
The year started with such promise and Yellen & Co had forecast four interest rate hikes. Despite a relatively smooth year domestically and abroad, growth is sluggish, inflation non-existent and rates stuck at the floor.
Like, Hotel California, the message of 2016 in central banking might be seduction, hopefullness and, ultimately, resignation that paradise is lost.
In Fed-speak, that means that 'normalization' is dead. The New Normal is the normal. The 'neutral' Fed funds rate isn't 4%, 3% or anything. Rates are zeroed out, the balance sheet is enormous and this is as good as it gets.
The Fed began making exit plans for QE and extraordinary measures in 2010. Nearly seven years later, the plan has been rejigged and will soon be de-facto abandoned.
This sentence might as well be removed from the statement because it's never going to happen:
"The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way."
