Market Less Impressed By Fed Hawks Than Sumner

     When Sumner read about what the Fed hawks were saying he declared victory-not at all for the first time, to be sure. Clearly the fiscal multiplier has been conclusively shown to be zero.

    From today’s news:

The marked improvement in the labor market since the U.S. central bank began its third round of quantitative easing, or QE3, has added an edge to calls by some policy hawks to dial down the stimulus. The roughly 50 percent jump in monthly job creation since the program began has even won renewed support from centrists, raising at least some chance the Fed could ratchet back its buying as early as next month.

I hope I don’t have to do any more of these.  The fiscal multiplier theory is as dead as John Cleese’s parrot.  The growth in jobs didn’t slow with fiscal austerity, it sped up!  And the Fed is saying that any job improvement due to fiscal stimulus will be offset with tighter money.  They talk like the multiplier is zero, and their actions produce a zero multiplier.  Has there ever been a more decisive refutation of a major economic theory?

     http://www.themoneyillusion.com/?p=21225&cpage=2#comment-249456

     There was some push back. Not just usual suspects like me but even from his friend David Glasner who agrees that Sumner is surely claiming too much at this point. 

     http://diaryofarepublicanhater.blogspot.com/2013/05/sumner-again-throwing-stones-at.html

     http://diaryofarepublicanhater.blogspot.com/2013/05/david-glasner-fiscal-multiplier-could.html   

     http://uneasymoney.com/2013/05/21/scott-sumner-meet-robert-lucas/

     The idea that the Fed 'talks as if the multiplier is zero' and that any fiscal stimulus will be offset is based on the idea that the hawks at the Fed are identified as the Fed itself. 

     In any case, the markets, unlike Sumner, saw nothing to celebrate when seeing the hawkish comments in the Fed minutes. The hawks are talking about ending QE3 sooner rather than later. Bernanke's testimony was seen as bullish-largely, but once the minutes came out the market reversed. However, even Bernanke's testimony leaves margin for error.

    "In a testimony to Congress on Wednesday, Bernanke sounded a dovish tone, remarking that the premature tightening of monetary policy carries a "substantial risk" of slowing the economic recovery. But in an answer to a question from a congressional committee, he also said the central bank could start paring back purchases in a couple of months and these comments helped send U.S. stocks lower."

     http://www.cnbc.com/id/100759944

     The market doesn't want to hear that. Now there's confusion for who to believe. 

    http://online.wsj.com/article/SB10001424127887324659404578498981449291750.html?mod=WSJ_article_MoreIn_Markets

     Alan Blinder urges us to believe Berannke not the hawks.      

      http://www.cnbc.com/id/100759944

      Ok, but he at least suggested that unwinding by the Summer is a possibility. The market would rather hear it's not a possibility.