The Fed's decision not to taper was a protest

But do they protest too much?

The Fed’s decision to surprise the market by NOT tapering last Wednesday was clearly intended as a protest at the market’s interest rate expectations and maybe also told us that now Larry Summers has been forced shamefully out of the contest, the front-runner to replace Mr Bernanke, San Francisco Fed President Janet Yellen, is already easing herself quietly into the Chairman’s seat.

The FOMC’s shock tactic certainly had the desired effect, sending Treasury yields tumbling and forcing estimates for the timing of the first Fed Funds hike further into the distance.

My guess, however, would be that this is will be brief victory for the Fed, and maybe ultimately a Pyrrhic one, endangering its credibility; the reason being that the Fed’s actions and statements are littered with inconsistencies.

The Fed’s own prognoses for the economy, the Summary of Economic Projections (SEP) would have us believe that by the end of 2016 the US will be enjoying an employment rate between 5.4 per cent to 5.9 per cent, very close to the FOMC’s own estimate for the long-run "full employment" rate which the economy can support without inflation getting out of hand, of 5.2 per cent to 5.8 per cent.  However, extraordinarily, the SEP also tells us that inflation will be at or near the 2 per cent target, but that the nominal Fed Funds rate will still only be at 2 per cent (meaning the real rate will be near zero).

This set of outcomes would represent an unheard of state of affairs; for instance, the standard piece of theory used by economists to predict the  appropriate level for interest rates, given prevailing unemployment and inflation rates, the so-called Taylor rule, would suggest a Fed Funds rate close to the long-run neutral level, which the FOMC itself estimates as 4 per cent!

When asked about these inconsistencies at the post-meeting press conference Chairman Bernanke said that “there may be possibly several reasons” for their end-2016 Fed Funds rate expectation being still far below the long-run neutral level but the “primary reason for that low value is that we expect that a number of factors, including the slow recovery of the housing sector, continued fiscal drag, perhaps continued effects from the financial crisis, may still prove to be headwinds to the recovery”.

Really? Eight years after the Financial crisis peaked? Why exactly? Show a little more faith in the US economy’s "animal spirits" please, Mr Bernanke but, hang on, your growth estimates for the next few years, with real GDP growth forecasts of 3.0 per cent in 2014, 3.25 per cent in 2015, and 2.9 per cent in 2016, are really quite upbeat? They don’t suggest that the crisis will still by then be inflicting the sort of structural damage that would call for the bizarre combination of economic variables and interest rates which you are trying to convince us will pertain?

My feeling would be that the Fed, like the BOE, will have to raise rates far earlier and faster than it would have us expect. Not tapering would have delivered an effective slap on the wrist to the market, the combination of the SEP and the forward interest rate guidance together meant "they did protest too much".

Ben Bernanke Photograph: Getty Images

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

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I was wrong about Help to Buy - but I'm still glad it's gone

As a mortgage journalist in 2013, I was deeply sceptical of the guarantee scheme. 

If you just read the headlines about Help to Buy, you could be under the impression that Theresa May has just axed an important scheme for first-time buyers. If you're on the left, you might conclude that she is on a mission to make life worse for ordinary working people. If you just enjoy blue-on-blue action, it's a swipe at the Chancellor she sacked, George Osborne.

Except it's none of those things. Help to Buy mortgage guarantee scheme is a policy that actually worked pretty well - despite the concerns of financial journalists including me - and has served its purpose.

When Osborne first announced Help to Buy in 2013, it was controversial. Mortgage journalists, such as I was at the time, were still mopping up news from the financial crisis. We were still writing up reports about the toxic loan books that had brought the banks crashing down. The idea of the Government promising to bail out mortgage borrowers seemed the height of recklessness.

But the Government always intended Help to Buy mortgage guarantee to act as a stimulus, not a long-term solution. From the beginning, it had an end date - 31 December 2016. The idea was to encourage big banks to start lending again.

So far, the record of Help to Buy has been pretty good. A first-time buyer in 2013 with a 5 per cent deposit had 56 mortgage products to choose from - not much when you consider some of those products would have been ridiculously expensive or would come with many strings attached. By 2016, according to Moneyfacts, first-time buyers had 271 products to choose from, nearly a five-fold increase

Over the same period, financial regulators have introduced much tougher mortgage affordability rules. First-time buyers can be expected to be interrogated about their income, their little luxuries and how they would cope if interest rates rose (contrary to our expectations in 2013, the Bank of England base rate has actually fallen). 

A criticism that still rings true, however, is that the mortgage guarantee scheme only helps boost demand for properties, while doing nothing about the lack of housing supply. Unlike its sister scheme, the Help to Buy equity loan scheme, there is no incentive for property companies to build more homes. According to FullFact, there were just 112,000 homes being built in England and Wales in 2010. By 2015, that had increased, but only to a mere 149,000.

This lack of supply helps to prop up house prices - one of the factors making it so difficult to get on the housing ladder in the first place. In July, the average house price in England was £233,000. This means a first-time buyer with a 5 per cent deposit of £11,650 would still need to be earning nearly £50,000 to meet most mortgage affordability criteria. In other words, the Help to Buy mortgage guarantee is targeted squarely at the middle class.

The Government plans to maintain the Help to Buy equity loan scheme, which is restricted to new builds, and the Help to Buy ISA, which rewards savers at a time of low interest rates. As for Help to Buy mortgage guarantee, the scheme may be dead, but so long as high street banks are offering 95 per cent mortgages, its effects are still with us.