What Bernanke signaled this week is that QE is no longer an emergency government measure, but is now a permanent government program.
In exactly the same way that retirement and poverty insurance became
permanent government programs in the aftermath of the Great Depression, so now
is deflation and growth insurance well on its way to becoming a permanent
government program in the aftermath of the Great Recession. The rate of asset
purchases may wax and wane in the years to come, and might even be negative for
short periods of time, but the program itself will never be unwound.
There is very little difference from a policy efficacy perspective between
announcing a small taper of, say, a $10 billion reduction in monthly bond
purchases and announcing no taper at all. But there is a HUGE difference from a
policy signaling perspective between the two. Doing nothing,
particularly when everyone expects you to do something, is a signal,
pure and simple. It is an intentional insertion of uncertainty into forward
expectations, a clear communication that the self-imposed standards for winding
down QE as established in June are no longer operative, that the market should
assume nothing in terms of winding down QE.
Choosing nothing over a small taper is only useful insofar as it signals
that the Fed prefers to maintain a QE program regardless of the economic