To me the idea of taper is easily explained by two words: asset inflation. You may feel compelled to add a third, uncontrolled, but until more empirical evidence is garnered (price collapses) I will at present refuse the license.

The cloak to this game has been “the improving economy”, as the former Fed doves tell it, the economy is now on course for smooth sailing and thus alleviated of the need for “emergency” measures. That was the story wrought of the estimations of Boston Fed President Eric Rosengren, one of the doviest of the doves.

In the latest FOMC decision this week, there was an additional dissenter (from one to two) against the majority policy decision and the all-important “language” in the policy statement. While that was a far cry from the more normal division of FOMC’s past, it does strike a different tone than the lockstep unanimity from just a few years back.

This new dissenter comes from the St. Louis branch of the Fed. President Bullard has not been a known “hawk”, so his dissent was somewhat surprising. Until this morning.

“Federal Reserve Bank of St. Louis President James Bullard dissented with the Federal Open Market Committee decision announced on June 19, 2013. In his view, the Committee should have more strongly signaled its willingness to defend its inflation target of 2 percent in light of recent low inflation readings.”

To read that right is to infer that the St. Louis branch is somewhat concerned about the potential for deflation (“defend its inflation target”) rather than inflation from an improving economic track.  If that wasn’t enough of a kick against dovish consensus, President Bullard went into full opposition to his fellow stimulus travelers:

“The Committee was, through the Summary of Economic Projections process, marking down its assessment of both real GDP growth and inflation for 2013, and yet simultaneously announcing that less accommodative policy may be in store.”

So much for the improving economy. Taper is, and always will be in the age of QE, about bubbles. Nothing more – the economy is on its own course independent of monetary policy.


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