The Fed Has Lost Its Cred
In May, he telegraphed the "taper" of the Fed's "Large Scale Asset Purchase" program (known as LSAP to Fed economists and quantitative easing, or QE, to Wall Street) based on a strengthening economy and labor market.
The market reacted by pushing 10-year Treasury yields to nearly 3% from 1.6%, one of the most rapid backups in yields on record. Then, in the face of that strengthening economy and labor markets, last Wednesday, Bernanke pulled the rug out.
The Data: Except for the Bureau of Labor Statistics' (BLS) August unemployment report, almost all of the underlying data underscore a strengthening economy. Both ISM manufacturing and non-manufacturing indexes for August were strong, with the non-manufacturing index setting a record high. The employment sub-indexes were no exceptions. Initial unemployment claims have been in a steady and steep downtrend since 2010.
The week of Sept. 7 saw this number at 294,000, a number not seen since April 2006. The four-week moving average, considered more reliable, at 314,750, hasn't been this low since October 2007. The Fed's own economists have indicated that concerns over "structural" employment issues (i.e., labor force drop-outs) have been overdone. Job openings in the private sector are higher than at any time since 2008, and employers complain they cannot find qualified candidates.
Thus, based on labor market conditions, which Bernanke indicated was key, in conjunction with the lack of success of the LSAP programs in stimulating economic growth (also according to the Fed's own economists), the "taper" should have occurred.
After months of "taper" talk and years of trying to promote transparency, last Wednesday, something else happened. We don't know what it was -- yet. Maybe we will find out soon, or maybe we will have to wait for Bernanke's memoirs.