Musing On U.S. Monetary Policy From SALT Asia

U.S. investors aren’t the only ones trying to make sense of the Fed’s decision to postpone tapering. At the Salt Asia conference in Singapore, U.S. monetary policy is, not surprisingly, a hot topic, according to Barron’s Kopin Tan, who contributed this post via email from Singapore.

Jean-Claude Trichet, the former president of the European Central Bank, deftly fended off several invitations to second-guess the recent action of the Federal Reserve by citing the wisdom of “mutual admiration” among global central banks. But he did say that “forward guidance should perhaps be best left strictly for interest-rate policy.” Does he mean there should be less forward guidance on extraordinary measures like quantitative easing – given how the Fed’s recent communications on QE has befuddled the markets?

John Lipsky, former first deputy managing director of the International Monetary Fund, says it’s not entirely clear what impact QE3 has had on the underlying economy. But the market reaction to a potential tapering of QE3 was so powerful it gave the impression that QE3 – and the threat of its gradual removal – is more potent and critical than it really is.

Tharman Shanmugaratnam, Singapore’s Deputy Prime Minister and Minister for Finance, seems to agree. He said there has been far too much focus on when or if the Fed will taper. In time, “this will just be a footnote in history,” he told the gathered hedge fund managers. Far better to accept that over the next few years there will be less of the extraordinary monetary accommodation that we’ve all gotten so accustomed to.

Markets appear o.k. with that today. The SPDR S&P 500 (SPY) has gained  0.19%, the iShares MSCI EAFE ETF (EFA) has risen 0.09% and the iShares Emerging Markets ETF (EEM) has advanced 0.22%.