Why Isn’t Bernanke Having a Nervous Breakdown?
The short answer is that he is too delusional.
WSJ has a detailed report about the inner thinking of various Fed members, here.
Bottom line: The deliberating body of the Federal Reserve doesn’t have a clue. It does not appear most of the members understand how Bernanke’s new “tools” work. It does not appear that most members understand the difference between low interest rates and Fed money printing. Further, the confusion is multiple and from many different directions.
But what really caught my eye in the WSJ report was this snippet:
Before the meeting, officials at the Federal Reserve Bank of New York, which manages the Fed’s portfolio, had grown concerned, according to people familiar with the matter. The Fed’s portfolio of mortgage-backed securities was about to begin shrinking much more rapidly than anticipated, as low mortgage rates led more Americans to refinance their mortgages. That in turn meant the mortgage-backed securities held by the Fed were being paid off.
The size of the Fed’s portfolio has become one of the central bank’s major monetary tools. A shrinking portfolio in the face of slowing economic growth was unwelcome to many officials, including New York Fed President William Dudley. It amounted to prematurely applying the brakes.
The New York Fed’s markets chief, Brian Sack, had been revising up his estimates of how much the portfolio would contract. In a memo circulated by Mr. Sack’s group a few days before the meeting, the estimate was revised up again. In March, the group projected the portfolio would contract by a bit more than $200 billion by the end of 2011. In a memo circulated by Mr. Sack’s group a few days before the meeting, the estimate was revised to up to $340 billion. In addition, about $55 billion in debt issued by the mortgage giants Fannie Mae and Freddie Mac that the Fed held would likely be paid off. Taken together, it represented a potential 20% drop in the Fed’s holdings in 18 months’ time
These are the kinds of surprises you are going to get with Bernanke’s new, untested for any length of time, “tools.”