US Federal Reserve chairman Ben Bernankes shock announcement on Wednesday that the US central bank was not ready to pare back its stimulus programme could make it more difficult for his successor to navigate the Feds way out of its extraordinarily aggressive policy.
Economists had expected Bernanke to follow through with the rough chart he had drafted in June: trimming the US Feds bond-buying programme before year-end and ending it by mid-2014,when he expected the unemployment rate to be around 7 per cent.
On Wednesday,however,he said only that tapering the purchases could possibly begin later this year and that there was no magic number for unemployment to mark its end.
Delaying a reduction in the Feds $85 billion-a-month bond-buying will likely make only a small impact on the overall size of Feds balance sheet,now at $3.6 trillion and counting. But it injects a huge amount of uncertainty into the equation,and leaves Bernankes successor without a useful roadmap. Part of the reason I thought the Fed was committing to some type of tapering was because they wanted to set a course,to make it more difficult for (Bernankes) successor to deviate from it, said Eric Stein,a portfolio manager for Eaton Vance.
He said the Fed now risked further misalignments between its intentions and financial market expectations,particularly given that a new chairman is expected to be at the helm by February 1. I do think it will be harder because markets do misjudge.
Even if Bernanke announces a reduction in the bond buying at the next Fed meeting in October,he will likely be a weakened lame duck.
Whoever succeeds him will inherit both the massive balance sheet and a series of policy promises that stretch ahead for years. He or she will also need to contend with the disappointing economic recovery and stubbornly high jobless rate four-and-a-half years after the recession ended.