Good news and bad news from the Fed

One of these days, you have to hope that the US central bank will think it's safe to starting turning off the taps. But it's not going to happen this month. And probably not the next one, either.

A sensible Martian would think it was bad news, that the US central bank thinks the world's largest economy still needs just as much emergency support as it needed a year ago.

But apparently, it's not. Markets everywhere have rejoiced.

Lesson one is that five years on from the start of the crisis, the global financial system is still a seriously screwy place.

Lesson two is that when Fed policy-makers said there was no "pre-set course" for winding down quantitative easing, they really wanted you to believe them.

In July, Chairman Bernanke said there would need to be a substantial improvement in the labour market for the tapering process to begin.

There has indeed been an improvement in the past few months - with unemployment falling to a five-year-low. But, as I mentioned in my piece for the TV news on Tuesday, that has been almost entirely due to people dropping out of the workforce.

If the labour force participation rate today were the same as it was in 2008, the unemployment rate would be over 10.5%.

Chairman Bernanke mentioned the decline in participation in his press conference, but he also said that the fall in unemployment over the past year had come mainly from new jobs. In that period, he noted, the private sector had created more than two million jobs.

It's not that the medicine isn't working, the chairman seemed to be saying - it's just that when it comes to the jobs market, we have an appropriately demanding definition of good health.

He and his colleagues are also worried that politicians warring over the national debt are going to hurt the recovery, yet again.

Finally, he does not want the rise in long term borrowing costs that's greeted all this taper talk to get out of hand.

For all these reasons, the Fed decided to stand pat.

The market conditions argument has a circularity to it: talk of tapering leads to higher market rates, which in turn puts the taper itself on hold.

But, it's not quite as simple as that, because Mr Bernanke thinks some of that "tightening" marks the bursting of a mini-bubble.

Many economists would say that long-term interest rates - or bond yields - in the first part of 2014 were just too low. They didn't make sense under any remotely plausible trajectory for the recovery.

In his press conference the Fed chairman seemed to agree. Up to a point.

He said that part of the upward move in rates since May had come from an "unwinding of excessively risky positions". The tightening that was associated with that process was "unwelcome", but the fact that the positions had been unwound would make the situation "more sustainable" from here on in.

So, the Fed chairman doesn't want people in the markets to take "extreme positions". But nor does he want any further tightening in financial conditions, more than 4 years into a recovery.

If you think there's a tension between those two things, you're not the only one.

Does any of this mean that the broad timetable for winding down quantitative easing is now seriously off track? I don't think so, but there are plenty who do. Certainly, the Fed has not made that timetable any easier to predict.