Tags: Lindsey | Fed | taper | rates

Lawrence Lindsey: No Taper This Year, Rate Hikes to Be 'Disorderly'

Friday, 20 Sep 2013 01:04 PM

By Michelle Smith

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Tapering of the Federal Reserve's quantitative easing (QE) isn't in the cards any time soon because the central bank is nowhere close to reaching its goals, says Lawrence Lindsey, CEO of Lindsey Group and former economic adviser to President George W. Bush.

The Fed's strategy of setting and announcing targets for policy change was widely viewed as a positive move toward greater transparency. But market participants are now claiming mass disappointment that the central bank didn't taper without meeting those targets.

"The Fed had the best of intentions. It said, 'If we get to this employment, if we get to this growth, we'll do it.' [But] they didn't. They missed. They didn't do it," Lindsey told CNBC.

Editor’s Note:
5 Reasons Stocks Will Collapse . . .

"I don't think they'll taper this year," he said, explaining that it's going to be difficult to get to a point where it's possible.

"The best that monetary policy can do is move demand around. It can't create new growth, but it can take tomorrow's spending and move it forward," Lindsey added.

Having lower interest rates provides an incentive to buy things sooner, whether you're considering a new car, a home or factory equipment, he explained.

But "constantly sucking tomorrow's demand into today" creates another challenge —"When are you ever going to get off the cycle?" Lindsey asked.

"It's very, very hard and I think the Fed is in that conundrum. It doesn't necessarily mean they did the wrong thing. It means it's going to take a long, long time for them to hit their goals and I think we're going to be in a QE-type of situation for a long while" he predicted.

James Bullard, president of the Federal Reserve Bank of St. Louis, continues to peddle hope that the taper will happen sooner rather than later. He believes a cut in bond purchases could come as soon as next month.

In fact, not tapering at this week's Federal Open Market Committee meeting was "a borderline decision" made after "weaker data came in" he told Bloomberg TV.

In October, there will be what Bullard describes as a "live meeting." And "it's possible you could get some data that change the complexion of the outlook and could make the committee be comfortable with a small taper in October" he told Bloomberg.

These statements come at a time when many say the Fed has lost credibility. Market participants blame the central bank of psyching them for a stimulus reduction then rendering an unpleasant surprise.

Bullard claims he is "dismayed" by the public's reaction because the Fed repeatedly said the decision is "data dependent" and tapering would occur if there was improvement in the second half of the year.

It just goes to show, "transparency is not all it's cracked up to be," Lindsey told CNBC about the market's disappointment.

The Fed's approach of laying out every strategic detail and tying itself to particular numbers is not a very good strategy, he argued.

The interest rate story is likely to play out differently than the stimulus tapering saga. Lindsey doesn't think the Fed will be able to control the schedule for action. Rate hikes are likely to happen in a "disorderly way," Lindsey predicted.

"Something's going to happen, some glitch. Some time the market's going to get tired and say 'OK guys, you've got to raise rates.' And the Fed is going to have to accommodate that," he noted.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

Related Stories:

WSJ: Bernanke's Decision Against Tapering Shows 'Failure of Nerve'

Buffett: QE No Panacea but May Be Helping Economy

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