The universal symbol for drama dates back to ancient Greece. It is the comedy-tragedy mask. If you are unclear about what that symbol looks like, picture two masks - one showing a happy face and the other showing a sad face. That is the comedy-tragedy mask. It can be found in your Playbill. It can be found on Mardi Gras necklaces. And it can be found at the upcoming FOMC meeting.
For nearly one hundred years, the Federal Reserve has created great theater for the capital markets with its monetary policy. Its plays always evoke a range of emotions, yet they rarely have a perfect ending.
The Fed's latest play has involved a number of cast members and a number of subplots. The main plot line, however, has been built around the idea that purchasing Treasury and agency mortgage-backed securities will produce a perfect ending for the labor market and the broader economy.
That plot line has yet to be fully developed -- even after the introduction of taking the fed funds rate to the zero bound and three subsequent acts of quantitative easing -- yet it sounds as if the Fed is ready to start bringing its play to a close.
To do so, the Fed will put on a happy face in public by calling attention to the improvement in the labor market. Behind closed doors, though, we think a sad face will be worn knowing it has been unable to write a perfect ending with its asset purchase program, where the costs have outweighed the benefits.
Central Tendencies
In his semi-annual testimony to Congress on the economy and monetary policy in July, Fed Chairman Bernanke clarified the role asset purchases are playing in monetary policy. Specifically, he said:
"We are using asset purchases and the resulting expansion
