The Importance of Money

Gold is one of the earliest forms of money. Goods are priced in ounces of gold. Exchange of goods takes place via the medium of gold. Those with excess goods will sell them and hold gold as wealth and thus defer consumption of these goods. People always need to keep some gold around to effect transactions. If they have none they need to sell something (their labour perhaps) to acquire gold. Unmediated exchange is always possible but as the economy grows larger and more complex it becomes more difficult and rarer. An habitual amount of gold is typically kept in proportion to wealth and normal levels of transactions. In other words, there is a stable demand for gold in proportion to economic activity.

At any point the supply of gold is fixed (or grows only at a steady rate determined by existing mines and the rate of gold production). This fixity of supply is important. What happens in this economy if the supply of gold is fixed but output and exchange is growing? If the demand for gold is stable as a proportion of exchange activity then growing exchange implies a growing demand for gold. However, the supply is fixed (by assumption). There is thus a chronic excess demand for gold. One way to fulfil this is to raise the price of gold in terms of goods and services. The same physical amount of gold can then serve a growing economy because the value of gold (in terms of goods and services) is growing in proportion. However, what do we call a rising value of money in terms of goods and services? Deflation.

Periodically, new mines are discovered and the supply of gold expands exogenously. This can lead to inflation and the miners expand their consumption far more quickly than goods production can respond. Eventually, the goods demand expansion may lead to a goods supply expansion and everything settles down again. However, note that economies and the volume of exchange tend to grow steadily (at least in line with population), so unless there are constant new discoveries of gold, a deflation bias will exist in an economy mediated by gold as money. The result is the gold standard.

Under the gold standard banks issue notes and coin that are ostensibly backed by gold (promissory notes). In principle one can turn up at the bank and ask for the physical gold equivalent of the coin value. In practice few do except in extreme circumstances and so the notes and coin in circulation, the promissory notes, serve as money. This is rather useful as it removes the deflation bias introduced by the fixed supply of physical gold. However, unless carefully regulated it introduces an inflationary bias. As long as people are willing to use these promissory notes as money the banks can print as many as they like and get goods and services in exchange. This seigniorage is typically purloined by the state which vests this power in its central bank. This does not automatically remove the inflationary bias though as governments are not averse to over-issuing in order to fund state spending. This is known as monetary financing.

The habit of using state issued promissory notes as money renders the need for even pretending that they are gold backed pointless. This fiat money (money because the state says it is) is now the common form of money in the modern economy (though Bitcoin is making a place for itself in some darker corners of the digital economy). In the modern banking system the state issued fiat money takes on the role of gold. The notes and coin in your pocket constitutes state issued fiat money. However, most holdings of state issued fiat money is via deposit taking institutions or banks. Th habit has developed of treating these deposits as money. However, these deposits are loans to the banks. The guarantee system insures a proportion of the deposit but anything in excess is uninsured and a, albeit senior, bank loan.

This system has worked quite well until recently because of substantial independence given to central banks and the mandate of price stability. The central banks judge how much money is necessary to support the economy to grow at its potential and aim to see that money growth proceeds at this rate. This ensures no inflationary or deflationary bias. The problem is that they do not control money creation. This is because the deposit takers intermediate. If the central bank wants money growth it has to persuade the deposit takers to lend and expand deposits. This is because it is these deposits that people primarily use as money. If they do not lend then how can the deposit base grow? If the deposit base fails to grow then the economy will experience an effect similar to there not being enough physical gold when exchange is growing, namely a deflation bias.

The 2008 financial crisis upset this situation in two ways. One is widely understood. One it seems is not understood at all. First, it stopped banks from expanding loans as fast as the central banks might have wanted. This created a deflationary bias which the central banks tried to offset via quantitative easing. However, this fell foul of the second unrecognised effect. Bank deposits above insured amounts are no longer deemed to be money. This is because the ‘too-big-to-fail’ category of bank no longer exists. Holding a deposit over and above the insured amount is no longer deemed as safe as cash. The EU banking reform has made this explicit and the Cyprus crisis has illustrated what this can mean. Greek banks may now be about to experience the same reality. QE removes safe government debt from the system and replaces it with large, uninsured bank deposits. How does this help the lack of money growth?

The purpose of this little blog is to illustrate how money growth is important in an exchange economy that is mediated by money. The gold economy is clear enough. The advent of jargon and complex processes often obscures the fact that this same mechanism applies in a modern economy. Money is whatever is deemed money but it must grow in line with the economy to avoid inflation or deflation bias. The central banks understand that the deposit taking system may not work under extreme circumstances. They appear to have missed the significance of a fundamental change in what is acceptable in the role of money.

Taper! Taper! Taper!

The taper debate has become rather tedious and, as has been indicated in previous blogs, is something of red herring. Goldman Sachs economists do not think it will happen at the December 18 meeting for a lot of good reasons (http://jmp.io/T7x). The most compelling is that major policy changes are best not announced at this time as the markets are quite thin and illiquid and the reaction can be disproportionate. Moreover, waiting a few weeks is not going to make much difference so, unless the Fed actually want to add some market volatility, it would be advised to wait. The Gestaltz view is that they should have done the taper already and this would have returned the initiative on monetary policy to the Fed sooner. However, by waiting they have achieved the same although they have frustrated many investors ( well me anyway).

It is open to question whether QE as such has actually achieved much. Despite the QE, the Fed Funds rate at near zero and forward guidance that Fed Funds will stay at near zero as long as is necessary, inflation has continued to decelerate. The implication is that Fed Funds at near zero and forward guidance alone would have achieved much the same as with QE. Without QE, inflation would have been no higher (and possibly lower) so long-term interest rates would probably not have been very different to what they were under QE. Removing QE at a gentle pace whilst continuing to keep Fed Funds at near zero is not going to have much practical significance. This is especially true if the Fed also adjust downwards the proxy targets at which they will start to review their forward guidance. Unemployment is drifting lower but so is inflation. The two are being used by the Fed as proxies for the extent to which GDP is below potential. The Fed is not going to adjust forward guidance if unemployment is dropping but wages and inflation are still deemed to be decelerating. It is more likely to assume that the NAIRU is lower than previously thought, and to adjust the target unemployment rate lower. So what is all the fuss about?

Markets like to worry and agonise about the self-evident. It makes the players feel informed and self-important even though most have little clue what all these issues really add up to. In this particular case they add up to nothing. The gentle withdrawal of QE will have little practical significance in the context of forward guidance and a moderate but sustained economic uptrend. The yield curve has already largely discounted the withdrawal and getting the event out-of-the-way may boost both bond and equity prices. Let us move on.

Abeconomics: Dollar Yen to 124…?

Looking at the weekly Dollar Yen chart it hard not to conclude that it will reach 124 before this rally ends. There seems to be a well defined continuation pattern, the measured move ending at 124 or thereabouts. To be sure there is resistance at 106 but there is always resistance somewhere! The path may not be a straight line but retracements are bounded below if it is a continuation pattern. The stop levels would need to be within the range 99 to 96. Still risking 6 points to make 22 is not bad risk/reward and you could operate with a 3 point stop from present levels. This could be the most lucrative trade of the next 12-18 months. Oddly enough it is not being widely discussed.

There is widespread scepticism about the Abeconomics programme. It is not hard to find someone who will dismiss it. This is not entirely surprising given how long the Japan deflation has been in place. There is nothing magical about Abeconomics. It is an approach that could have been adopted at any time over the last 20 years. Aspects of the programme have been adopted and appeared ineffective. So what has changed?

As always the past has conditioned thinking and is generating scepticism. The real change is in the commitment to success. Abe has basically said ‘whatever it takes’. The big problem was to get monetary growth with a broken banking system (take note eurozone). Abe told the BoJ to double the money supply in two years. However, reading between the lines one can see this is not a target. The real statement to individuals and markets alike was ‘your size is my size’. For the reader not familiar with trader-talk, this simply means how much monetary growth do you need to persuade you that the deflation is over? This is how much you will get. Moreover, if the banks cannot deliver it the central bank will do so directly. It will print money and hand it over to the government to finance its spending. Of course, Abe has not used this language but this is his meaning and intent. Moreover, there is no going back. He continues until the deflation mentality has been broken. Most important, if he continues it will eventually break. So is there is a logic to Dollar yen at 124? There is, most certainly.

A lot of ‘buts’ can and will be thrown at this view. Most have been answered in the previous Abeconomics blogs. Perhaps the most compelling argument however is the above chart itself. If a chart indicates a well defined move it is remarkable how often the move occurs even though it seems implausible for most of the journey.

Deflation, the euro and the banking union

An interesting article in the FT (http://on.ft.com/1cmvPWX) by Lorenzo Bini Smaghi  draws attention to the eurozone’s collective trade surplus at a time of increased demand for eurozone assets. He attributes this situation to the ‘strength’ of the euro. The parallel with the situation in Japan over the last 20 odd years is quite striking. Indeed he does not mention but alludes to another parallel; deflation. He suggests not sterilizing Security Market Purchases, though they might also need to grow to have much impact. The thrust of his argument is that there is a growing demand for euro balances which the ECB is unable to meet.

In some respects this might sound surprising given that the very existence of the euro has been in question in the last few years. The existential threat is deemed to have passed and the demand for euro is now a matter for economics, and not simply politics. The threat of deflation will of course increase this demand for euro balances and presumably the demand for the euro vis-a-vis other currencies. The parallel with the Japan experience is thus complete.

Deflation, as previous blogs have explained at length, is structurally negative inflation expectations. The logical behaviour in this environment is to hold fiat money or near money. The return to holding such money balances is the negative inflation rate plus any (normally positive) nominal interest rate paid. The only way to discourage holding such balances is to force nominal interest rates negative. However, this is quite difficult. Another way of looking at this is to note that in a deflation it is virtually impossible to force real interest rates into negative territory. If this sounds odd recall that expected inflation is negative by definition. This situation did prevail in Japan for a substantial period during which the Yen strengthened against most other currencies. Can this happen in the eurozone?

The implication of previous blogs is that it most certainly can. In a monetary union adjustment for competitiveness reasons occurs through wages and prices. If one dominant economy within the union insists on price stability within its national economic area, then the burden of adjustment falls on all other member states. This is the situation with the strongest economy, Germany, insisting on price stability in its region and forcing less competitive ‘partners’ to bear the whole burden of adjustment. Deflation is an inevitable result within the eurozone, possibly including Germany. A symmetric adjustment, with Germany accepting higher inflation for a period, would ease the burden and possibly avoid the deflation. However, this seems unlikely as Germany’s pathological fear of inflation and dominant economic position seem to dictate. The ECB is unable to print enough euros to meet the demand. The result may well be a situation not dissimilar to that of Japan in the last 20 or so years.

The other element is the banks. Japan banks remained broken throughout the deflation and were unable/unwilling to expand lending and hence create the necessary Yen balances to meet demand. The proposed banking union is trying to avoid this mistake by creating a healthy eurozone banking sector that will expand credit and create the euro balances that are in demand. If the banking union is not effective then the only hope of avoiding deflation is lost. Much more rests on a successful banking union than is widely understood. The conditions for an effective banking union have also been discussed at length in previous blogs. It is difficult to be optimistic.

Unlike Japan, however, the euro presents a conundrum. As long as the existential risk is ignored the euro may well tend to appreciate against other currencies as the deflation takes root. The difference is that Japan was , and is, a homogenous national entity that was unlikely to break up into sub-groups each with its own currency. The eurozone does not fulfill this criterion. The existential threat may return in a deflation which would undermine the currency. Tricky.

Scottish Independence, monetary union and the eurozone: keeping the pound

The Scottish independence referendum is fast approaching and the independence debate is beginning in earnest. Many claims are being made about what is and what is not possible. Some of these claims appear not well thought out. The recent experience of the eurozone provides one or two pertinent observations that the Scottish National Party might usefully heed.

There is no doubting Scotland’s distinct national,ethnic and cultural heritage. From this perspective independence makes sense. However, no doubt the Catalans in Spain and the Flemish in Belgium feel the same. This may be relevant to the claim that Scotland can leave the UK and retain membership of the EU (which apparently it wants to do). It would set an interesting precedent and the governments of Spain and Belgium might not be wholly accommodative. Even if they are, it is likely Scotland would need to reapply and this may take a while.

Much of the debate seems to be about what would happen to the BBC. Perhaps this is because the debate is largely taking place via the BBC. This also serves to distract the voter from some important issues. The most important is the question of keeping the pound (I confess that when I heard this I had a McEnroe moment). The proposal it seems is for an independent Scotland to retain the pound as its currency but achieve fiscal independence. The eurozone crisis has been caused by precisely this juxtaposition yet the SNP wish to replicate it!

Keeping the pound means remaining in a monetary union with the UK and having monetary policy determined by the Bank of England. This is the same relationship that the ECB has to the eurozone. What then would be the relationship between Scottish and UK (ex Scotland) fiscal policy? Fiscal independence has been progressively eliminated for member states of the eurozone in order to stop the monetary union from disintegrating. It is unlikely that the present arrangements are consistent with long-term stability within the eurozone and a federal fiscal structure is likely to emerge if the eurozone is to survive. In short, monetary union with independent fiscal policy is not a stable situation. Scottish independence with the pound is a nonsense.

Ultimately, the EU and the eurozone must become one and the same. If the eurozone is to survive it must become ever more integrated and take over the institutions of the EU to serve its needs. The non-EU countries will become progressively marginalised and either join EMU or leave the EU. If an independent Scotland plans to join the EU and stay within it, it will ultimately join an increasingly federal eurozone. It will be leaving one union and joining another. It will be no more independent than it is now but will be subject to an even more distant elected body in which it will have even less influence.

It is not difficult to see why Scottish Independence has such appeal given the tortuous history between England and Scotland. However, it is unwise to let emotion cloud judgement on such an important issue. If Scotland truly wants independence it should look to the Norway example; leave the EU and establish its own currency. Otherwise it is better off staying within the UK and negotiating more power for the Scottish parliament. Ironically, the strongest argument for Scottish independence would be if the UK voted to leave the EU and Scotland wished to stay within the EU.

Deflation and Disinflation in the eurozone

Logarithmic chart of German Hyperinflation. (Photo credit: Wikipedia)

The ECB insists that its interest rate policy is to combat disinflation and that there is no deflation in the eurozone. It might help to define deflation before having this debate. I offer a definition of deflation in my blog Abeconomics, deflation and the Japan conundrum (http://bit.ly/WVnCVP) that might be helpful in grasping this debate.

Inflation and deflation are normally discussed in terms of ex post outcomes of various price indices. However, both are fundamentally ‘states of mind’. It is the expectation of inflation/deflation that does the economic work. Price index outcomes will feed back and effect these ‘states of mind’ or expectations but there is much more going on. Deflation might be defined as structurally negative inflation expectations. People fear falling prices even if actual price falls are not spectacular. The same applies in reverse to structurally positive inflation expectations.

Structurally negative inflation expectations bring a particular form of economic behaviour. People like to hold wealth in cash or near cash assets. The expected return is the negative inflation rate plus any nominal interest they might earn. Indeed if inflation expectations are structurally negative then the demand for fiat money continuously exceeds supply. This is why prices keep falling. There is a simple solution. Supply the fiat money that is demanded.

For Japan this is a relatively simple matter. There is one central bank and one economy which happens to coincide with the sovereign entity. Nevertheless, despite the conceptual simplicity, Japan has failed to resolve its deflation in the last 20 or so years and is only now getting to grips with problem. The eurozone is not even conceptually simple. There is one central bank and many, loosely connected, economies, each coinciding with a separate sovereign state. Inflation expectations differ widely throughout this unusual economic grouping. Moreover, there is one very important state in which deflation, as defined above, might never occur; Germany. The Weimar experience (and all that ensued from it) has permanently biased German expectations towards inflation.

This presents the ECB with an interesting dilemma. Imagine a situation in which Germany (and its satellites) have positive inflation expectations whilst the rest of the eurozone enters deflation. One part of the eurozone fears rising prices and the other part falling prices. One part of the eurozone seeks assets that protect against inflation and the other part seeks fiat money balances. One way of building up fiat money balances is of course to not spend or invest. Borrowing is also discouraged. This could become a structural feature of the deflation part of the eurozone. A logical response to positive inflation expectations is to spend and invest a little faster. Money balances are then run down to a minimum and debt levels pick up.

All the averages that the ECB uses to judge monetary conditions might look reasonable. However, the distribution around the mean would be a lot wider. Interestingly the situation looks superficially self-equilibriating. Aggregate debt would be falling in the deflationary economy and rising in the inflationary economy. This is desirable in the present situation. However, falling investment and spending in the deflation economy would hit employment and living standards and, in a single market, drive population and capital to the inflation part of the eurozone. The deflation economies would become depressed regions of the wider eurozone economy. In Japan the state partly offset the effects by increasing public spending and public debt. In the eurozone no sovereign state has this option. The centrifugal force of the currency union, much discussed in the 1970s, appears to be happening.

The situation is made worse by the asymmetric expectations of the German economy. Recall the definition of deflation above. It is a state of mind. If inflation expectations are entrenched, as they seem to be in Germany, then they persist even if prices are falling. It is this that makes the risk of deflation in the eurozone that much greater than it might have been. The largest and most powerful economy has permanent positive inflation expectations. This economy also has the greatest political power and will resist all attempts at a symmetric approach by the central bank. If Japan, a unitary homogenous entity, could not avoid deflation why does everyone feel so confident that this fractured political and economic structure will do so when it is dominated by a country with asymmetric and positive inflation expectations?

Why on earth does anyone want to be part of this…?

Banking Union and the Single Resolution Mechanism: the road to federalism

The Single Resolution Mechanism (SRM) for the evolving European Banking Union (EBU) will be discussed again at the ECOFIN council meeting on December 10. The SRM is planned to come into effect on January 1, 2015. However, all is not going to plan and Berlin is the obstacle. It is not difficult to see why.

The commission proposal for the SRM (http://bit.ly/1jb82g9) envisages a strong central resolution body that will apply resolution decisions consistently across participating member states (the eurozone plus any EU members that wish). This body will be able to intervene in the banking system of a sovereign state and force it to resolve a bank. This body will be able to force Germany to resolve a bank if it deems it necessary. Not a popular idea in Germany. The body will have access to a fund, ostensibly financed by the banking sector, with which to effect resolution. It will deploy funds as it sees fit. In a systemic crisis the accumulated fund might prove inadequate and the question of collective funding arises. The idea of a collective fund introduces the possibility of joint and several liability into the agreement and Berlin is not comfortable. It could end up financing a body that will determine its banking structure.

To understand how the Commission proposal goes beyond existing arrangements one should recall the nature of the crisis response. It was structured as a series of bilateral agreements. The commitment of each eurozone member state to the ESM is bilateral. It is limited. Assistance is by agreement with the sovereign state. The state is not obliged to ask for assistance. If assistance is requested it is conditional. If assistance is offered it is conditional. At each stage the fiction of national sovereignty is maintained. Contrast this with the commission proposal to have an independent body that can intervene in a sovereign banking system at will and having access to a collectively generated fund to do so. Sovereignty in banking is clearly compromised and there is no lip service to the illusion of sovereignty.

The banking union is revisiting the issue of ‘mutuality’ that Berlin went to such lengths to sidestep in the response to the fiscal crisis. The Berlin preference in bank resolution is that it is funded at the state level. Moreover, it seeks a resolution mechanism that is under the control of a council of ministers. Berlin obviously has a lot of influence in the ministerial councils of the EU. This approach seems to have just about worked at the fiscal level but is nonsensical and quite dangerous at the banking level. Moreover, it is inconsistent with the single market principle.

The eurozone has one central bank; the ECB. The central bank manages monetary policy via the banking system. Logically, the eurozone needs a single banking system, with a single resolution mechanism under the control of a body just as independent as the central bank. However, this would require new legislation. The ECB pursues a eurozone-wide monetary policy and not one necessarily sensitive to Berlin’s needs. The Single Resolution Board (SRB) should pursue a single resolution mechanism not necessarily sensitive to Berlin’s view. The SRB should be as independent as the ECB. Given that the supervisor is the ECB perhaps the connection should be even closer. A single market in banking services does rather imply such an arrangement but is complicated by the fact that not all EU states are eurozone states. A single market in eurozone banking services is however both feasible and essential to the stability of the eurozone.

Perhaps the real fear of Berlin is that the commissions logical proposal leads to federalism. One of the stated reasons for a banking union is to break the link between the banking sector and sovereign debt. The domestic banking sector of a sovereign will no longer be able to fund the debt issuance of its supervisory sovereign at will. Although the Maastricht Treaty prohibited deficit financing by the ECB, the zero risk weighting of debt in bank balance sheets meant that banks could fund their own government largely unhindered. Presumably this will no longer be possible under banking union. Indeed, Basle 3 is risk-weighting sovereign debt a little. However, eurozone banks will need some highly liquid risk free asset to hold.

The pressure to issue a Eurozone Bond could come from the needs of the banking system. This would be the joint liability of all eurozone states…

Symmetric adjustment: domestic demand, exchange rates and price levels

Economic news in the UK in the 1960s was dominated by ‘balance of payments’ crises and ‘devaluation of the pound’. The burden of adjustment was always placed on the deficit nation. Running a surplus was always deemed virtuous. To the naive schoolboy (me) studying economics this all seemed a little odd. Adjustment in the deficit country meant either suppressing domestic spending and/or depreciating the currency. However, depreciating the currency is always symmetric. This is the elegance of freely floating exchange rates. It forces all to adjust.

The suppression of domestic demand however is not symmetric. Germany ran a consistent trade surplus throughout this period. In part this was born of competitiveness which the UK could at least partly adjust for through the exchange rate. However, the surplus was not simply a competitiveness issue. Germany also ran a very tight fiscal policy. The effect was to keep domestic spending below what it might have been and thus contributed to the trade surplus. The UK was forced to accommodate Germany’s overtight fiscal policy and pursue a tighter fiscal policy than it might otherwise have needed to run. Does all this sound familiar?

The eurozone is looking like a repeat of the 1960s. Germany is running a very tight fiscal policy. Its uncompetitive partners are being forced to run even tighter policies than they might have done to keep demand balanced within the eurozone. However, there is the added factor that symmetric exchange rate adjustment is no longer possible. In a freely floating exchange rate system relative fiscal policy would still be set by Germany. However, the corollary of weak southern european currencies would be strong northern european currencies. The relative price level adjustment would be symmetric. Not so in the eurozone.

Germany has no interest in seeing relative price levels adjust through German inflation. Nor do Holland or Finland for that matter. This is forcing the entire burden of relative price level adjustment (to compensate for relative productivity levels) on the low productivity member states. When combined with asymmetric relative fiscal policy adjustment, this has placed an excruciatingly painful burden of adjustment on the weaker economies.

This is why Hans-Werner Sinn could argue (http://on.ft.com/1bqcB20) that the ECB was wrong to cut interest rates at the last policy meeting. His view is that policy adjustment should always be asymmetric and Germany should never have to deviate from its tight-fiscal-policy-and-price-stability-within-Germany stance. The only option for Germany’s eurozone partners is adopt the same internal policy positions. Given the starting point this is a very painful ask.

The ECB is actually set up to run a symmetric monetary policy and spread the burden of adjustment more evenly. The target inflation rate (almost 2%…let us call it 1.9%) recognises that relative price level adjustments require higher than average inflation in some states. When even this target is not going to be met the ECB naturally acts through easier monetary conditions. Germany and its authoritative voices respond unfavourably because they believe Germany should not have to bear any burden of adjustment through higher inflation. They would have the ECB raise rates now!

Why anyone wants to be part of this eurozone is a mystery.

Regaining the initiative in Federal Reserve monetary policy

In a previous blog [ The S&P 500 and the Goldilocks Taper narrative] I suggested that only by initiating the taper can the Federal Reserve regain the initiative. It would appear that James Bullard of the St Louis Fed might agree with this conclusion. In a presentation made known to me by my friends at KGM Capital, James Bullard makes two notable observations. First, tapering is data dependent and specifically unemployment data. The presentation (http://bit.ly/16SufQ6) provides a chart that suggests unemployment is on a sustainable downward path. Second, the Fed is concerned that the market is linking forward guidance on interest rate policy with the pace of QE. The Fed regards these as independent policy tools. What does this mean in practice?

The initiation of tapering fear sent the forward yield curve higher. The market set forward interest rates higher than the Fed wished and was indicating it planned via forward guidance. The Fed wishes to start to scale back QE without initiating such a rise in forward interest rates. In the mind of the Fed this is possible but is being thwarted by the insistence of the market in linking two independent policy tools. James Bullard is quite clear:

“While changing the pace of asset purchases acts very much like a
conventional change in interest rates, this effect also spilled over to
the expected path of the policy rate, the Committee’s “forward
guidance.”

This effect was perhaps surprising in the view of policymakers, who
view the two tools as independent, but not in the view of financial
markets, which view the two tools as tied closely together.”

He concludes:

“The Committee is using two different policy tools—asset
purchases and forward guidance—which it views as
independent, but which are viewed as closely linked by
financial markets.
 This presents challenges for the Committee.”

Indeed it does and it, rather than data, is probably why the taper has been delayed. The reality is that market will always link the two. The only way to diminish the consequences for the forward curve is, ironically, to initiate a taper. This would then allow the Fed to signal to the market, through the size and frequency of variation in asset purchases, the importance and invariance of its forward guidance. Once the taper is out of the way its significance would diminish and the forward guidance would dominate the forward yield curve, which would settle back in line with the guidance. Tapering is essential to regaining the initiative in monetary policy by the Fed.

One must assume that James Bullard has grasped this as he states quite explicitly:

“The Committee[FOMC] needs to either:
 Convince markets that the two tools are separate, or
 learn to live with the joint effects of tapering on both the pace
of asset purchases and the perception of future policy rates.”

It cannot simply ignore the taper until it also wishes to change the forward guidance!