MORGAN STANLEY: The Fed Has Basically Given Up

vincent reinhartVincent Reinhart

Photo: Morgan Stanley

In his latest US Macro Dashboard note, Morgan Stanley chief economist goes back tot he Fed, and explains why the Fed hasn’t done more.He only sees one explanation…

Fed officials are apparently resigned to a poorly performing economy and harbor doubts about the efficacy of their policy instruments.  If this were not true, they would have done more so that their outlook did not imply the twin failures of unemployment running above its natural rate and inflation falling short of the Fed’s goal.

Going into last week’s Fed action, there were significant expectations of QE3. Instead the market only got the modest Operation Twist extension. And now the thinking among many is that no QE3 is in the offing (unless things get really bad).

Reinhart goes onto note what others have said, that the Fed doesn’t want to be a “story” during the election, but that if things did get bad, then the Fed would feel comfortable doing, since that would be a story of the Fed ‘reacting’ to bad news, rather than the Fed doing something unprompted.

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