1. Dow was up almost 300. This is a reasonably expansionary move. Not a game changer, but significant.
2. Lots of wild swings, but ten year yields ended almost unchanged. That tells us that the liquidity effect and the longer term effects (from faster expected NGDP growth) were both powerful, but fought to a draw. A classic example of how interest rates tell us very little about the stance of monetary policy. The simplistic liquidity view is clearly wrong. The simple contrarian view is also clearly wrong. It’s complicated. I’ve always believed it’s complicated, but some of my past posts emphasized the contrarian view, and today made those posts seem off base. As did the modest run up in rates when taper talk first surfaced. I need to be more clear. But we also learned in September that most of the run-up was due to stronger growth expectations, perhaps only about 20 basis points was taper talk.
3. Back in 2009 and 2010 I frequently argued that the fiscal multiplier might be negative. Many people had trouble understanding this idea, which was based on monetary offset overreaction. Suppose Congress does nothing in 2009. Bernanke thinks; “Oh my God we have a Great Depression on our hands.” He doesn’t want to go down in history as the Fed chair who presides over another Great Depression. Not after being a scholar who devoted his life to showing how the Fed could have prevented the Depression. My claim was that in the absence of fiscal stimulus the Fed would have offset Congress’s failure with some really powerful monetary stimulus, probably the level targeting that he recommended to the Japanese, but which the Fed itself never did (perhaps because Bernanke could never convince “Fedborg.”)
OK, but that’s just monetary offset, a zero multiplier. How could I claim the multiplier might be negative? The second part of my argument was that the Fed overestimated the power of QE and underestimated the power of forward guidance, such as level targeting. Had there been no fiscal stimulus, they would have done something else dramatic in order to prevent a depression. And that “something else” would have been far more powerful than the Fed anticipated, indeed more powerful than QE plus the ARRA fiscal stimulus. Some of what Bernanke calls “Rooseveltian resolve.”
So how does today support my negative multiplier theory? The Fed felt uncomfortable doing so much QE. They wanted to taper. But they didn’t really want to tighten. So they tried to offset the taper with a modest increase in forward guidance. But they didn’t realize how powerful forward guidance is, and actually ended up more than offsetting. Much more. It’s like the first time I went to England and had a few pints of beer. The pint glass was much bigger than in America and it was 6% alcohol, not 3.5% like American “beer.” I was almost drunk. Or to paraphrase Bob Dylan:
The Fed started out on burgundy but soon hit the harder stuff.