The research staff at TheMoneyIllusion.com anticipates that unemployment will fall to about 6% by the end of 2014. If so, then market monetarists can be expected to begin tapering their calls for monetary stimulus about 12 months from today. Of course this decision will depend on the outcome of a Federal Market Monetarist Committee vote. Some of the more hawkish members, such as Lars Christensen, are prepared to begin tapering today. In contrast, Ben Cole prefers a data-driven approach, and is looking for the data point “hell freezes over.”
Recall that this taper forecast is not unconditional, but will depend on the future path of the economy. If tapering does occur you can expect about 10% fewer demands for monetary stimulus each month. When tapering is complete most market monetarists will not rest on their laurels, but instead focus on the need for more forward guidance, especially NGDPLT. Once this recession is solved, the goal is to prevent the next recession. That requires a new policy regime with much more robust forward guidance.
We decided to give readers a heads up on a possible taper decision, so that they’d have time to plan accordingly. Of course if this post triggers outrage among my readers, and ad revenue falls sharply, I may delay the taper decision a bit longer.
When Bernanke and I say “data driven,” we actually mean “market driven.”
PS. Blogging will be sporadic over the holidays.