Where does this leave us? The Federal Reserve is caught; policymakers are warily watching the economy, worried that their liquidity injections will catch fire. On the other hand, they suspect that the economy will demand greater stimulus, if their estimates of the Taylor Rule are any guide. Caught, they want to remain flexible, and hence are unwilling to commit to numerical targets, either money growth or long rates. Hard to blame them; for the last decade, excessive easing has always caused something seemingly good that was followed by something very bad. But with the output gap certain to widen, the bias will be on the side of additional easing, while the timing will be data dependent. The green shoots story is looking a little tired today; a wide swath of indicators in the commodities market suggests that overall demand remains subdued. That will not stop a segment of market participants from playing up the green shoots story – they want to get ahead of the next big move. I remain wary that there is any room for an easy bounceback; I can’t shake off memories of 2001-2003, and I don’t see where we get another asset bubble in the US to crank up the wealth engine.
