The Fed’s dilemma is to reconcile the lack of evidence that its QE programs created jobs or moved the needle on inflation, with the fact that the size of the central bank’s balance sheet is getting quite worrisome. Before the 2008 financial crisis, the size of the Fed was around 6% of nominal GDP, and now it is about 25% and climbing. The next three FOMC meetings, on 17-18 December 2013, 28-29 January 2014, and 18-19 March 2014, are not only likely to see Ben Bernanke hand the gavel over to Janet Yellen, but also see the internal debate become much more rancorous concerning the appropriate size and role of the central bank. More than a few Fed Governors and regional Fed Presidents are likely to argue that the central bank needs to recognize the limits of what it can accomplish, given the headwinds from fiscal tightening, Congressional-induced economic uncertainty, and a slower growing labor force that is aging as well. All of these concerns will make for an exciting debate and are likely to lead to more volatility in both US Treasury bond and equity markets than have been the case during the QE era when volatility has been suppressed artificially.
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About Bluford Putnam
Bluford (Blu) Putnam has served as Managing Director and Chief Economist of CME Group since May 2011. He is responsible for leading economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy. He also serves as CME Group’s spokesperson on global economic conditions and manages external research initiatives.