Damaging taper idea should never have been floated

The Federal Reserve did the right thing in the wrong way and very likely for the wrong reasons.

The Fed said on Wednesday it would continue buying bonds at an US$85 billion monthly pace for now, citing concerns about a sharp rise in borrowing costs in recent months and the upcoming budget battle in Washington.

This came as a huge surprise to most people, well anyone who listened to and believed what Fed chairman Ben Bernanke has been saying for the past three months or so, when he did a masterful job of setting the market up for a tapering of bond purchases.

"The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labour market," the US central bank said in a statement explaining its decision.

Seriously, the Fed, having led us to believe it would taper, just told us it wasn't tapering because we believed them. What, exactly, are we now to think?

I've been among those who criticised the Fed for artificially suppressing volatility in financial markets, but I didn't intend for them to increase it by acting unpredictably; I was hoping more that they'd let assets find their own values.

To be sure, this was the right thing to do. Neither of the Fed's mandates - controlled inflation or full employment - was anywhere near target.