Global monetary policy and the Fed: vive la difference
The Fed is not going to be spooked out of its exit strategy by a few weeks of market jitters. That was one clear message on Wednesday from Chairman Ben Bernanke.
Another unspoken lesson was that from now on countries with different economies are going to need to have different monetary policies as well.
That is why investors bought fistfuls of dollars after the Chairman spoke, even as they sold pretty much everything else. It may take a long time for monetary policy to get 'back to normal' - but today's best guess is that America will get there before anyone else.
It sounds obvious, that countries in different stages of economic recovery should get different monetary policies to match. But in the past few years the major advanced economies' monetary policies have been pretty similar; certainly a lot more similar than their recoveries. With the partial exception of the European Central Bank, they have all, in Ben Bernanke's phrase, had their feet firmly on the gas.
He has now confirmed that he does not expect that to be true in six months' time. By then, he suggested, the central bank of the world's largest economy expects to be starting to inject less money into the markets each month, with the quantitative easing (QE) programme finishing entirely by the summer of 2014. (The market term for the first stage is "tapering" - but, as far as I can see, in all the fuss the word 'taper' has not crossed Ben Bernanke's lips.)
Two things to note about that timetable. First, it's only part one. The end of new asset purchases doesn't mean a higher official interest rate right away.
The new FOMC forecasts show that 15 out of 19 members of the Fed's policy committee expect the first rate rise to be 2015 or later. And even a rise of one percentage point would still leave interest rates at a historically low rate. It would not be "normality'.
The second key point, repeated again and again by Chairman Bernanke, is that the path to the end of QE is "economically dependent". It depends on the recovery continuing, despite this year's federal budget cuts. And it depends on the unemployment rate continuing to fall, from 7.6% now to around 7% next summer, and 6% or 6.5% in 2015..
To state the obvious - none of that is anything like a sure thing. But the biggest wild card of all may well be inflation.
The Fed's preferred measure of US inflation is now running at an annual rate of just 1.05% - the lowest in 50 years. If, at the end of the year, that number doesn't look like it is heading back to the Fed's target of 2%, the FOMC will not be happy toning down QE.
So, there are good reasons to think the Fed's exit might turn out to be even slower than planned.
But if events do unfold roughly as the US central bank expects, we found out today that the Fed's foot could be off the accelerator within a year.
The world's other central banks are about to re-learn the true meaning of central bank independence. It's hard enough to be independent of government. Now they also have to be independent of the Fed.