I am not a fan of quantitative easing or zero rates. I think that is clear from my posts over the past 4 years. Nevertheless, I do like to link out to posts that put QE and zero rates in a more favourable light because we need to get a comprehensive view of the situation to better understand what these policies mean for the US economy, interest rates and asset markets.
Below are a number of links on what is happening with the Fed, with Fed policy and regarding the picking of the next Fed chairman. These links have a wide range of diverging opinions on Fed policy and they are all coming out right now, I believe, because we are at a critical juncture in the Fed’s monetary policy actions. On three levels, the Fed may be poised to change.
The first change is in leadership, with Ben Bernanke commonly understood to be bowing out after this term. Janet Yellen is thought to be the most likely successor and so many people are scrutinizing her previous policy statements to get a fix on how she might be different from Bernanke. My general sense here is that she generally errs on the side of employment over inflation at this point in time. I also believe she is very attuned to the risks of monetary policy on asset prices and reaching for yield despite her present pro-employment bias. Overall, I think this means zero rates will continue for some time, with a tapering of QE beginning sometime mid-year. And I don’t believe she is appreciably different enough from Bernanke that it is going to matter. I like her forthrightness and quote from her speeches when I can because, of all the Fed governors, she most boldly reflects upon both the risks and rewards of Fed policy. (see here, here and here for example)
The second change is in QE. As I wrote above. I don’t see QE ending until at the end of the year. From what I have seen, the numbers do not add up to an unambiguously positive economic picture. And that means the reasons for QE remain in place. The problem in my view is asset market froth, particularly in bond markets where private portfolio preferences have moved to higher yielding and riskier asset classes. I believe the Fed is concerned about this and will look to taper asset purchases as soon as they can, depending solely on the pace of economic growth. If the key numbers like jobless claims, unemployment and GDP come in fine between now and June (with 330k average new jobless claims, +200k on non-farm payrolls, and +2% real GDP growth), then tapering can begin in June already. If any of these numbers is weak, we could see a delay.
I expect tapering sometime this year though because the Fed is concerned about asset markets. We would have to see a complete collapse in growth not to get tapering sometime this year.
The last change is interest rate policy. And this is going nowhere. I call the zero interest rate policy permanent zero for a reason. There is no indication that inflation is a problem and the economy simply is not firing on all cylinders. Moreover, Fed governors haven’t even hinted that they are considering interest rate hikes. It is clear from Fed talk that they are talking more about QE exit paths and reducing excess reserves than about raising rates. Therefore, I would expect both QE and excess reserve policy to precede any rate increase, making zero the policy rate for the forseeable future.
What does all this mean? First and foremost, to me, it means that zero rates will probably be the policy stance of the Fed when the next cyclical downturn occurs. And that therefore means that unconventional policy tools will maintain primacy in monetary policy initiatives. The question then will be about credit growth, non-performing loans, writedowns and the like because net interest margins will be non-existent in that environment and I think that means serious balance sheet problems for some banks that get caught out playing the ‘reaching for yield’ game.
You know what my thoughts here are. So I am not going to go over that. Instead I urge you to read the pieces below for a different perspective.
Cheers.
Edward
Fed sees easing in bank lending standards, loan demand up | South China Morning Post
“Banks eased lending standards to US businesses over the last three months as competition intensified and loan demand advanced, the Federal Reserve said, improving odds that ultra-low interest rates will be passed on to borrowers.
The findings of the US central bank’s quarterly senior loan officers survey, which provides a detailed dispatch from the front lines of the US economy, were broadly in line with other indicators showing steady, but still gradual growth.
“The survey results generally indicated that banks’ policies regarding lending to businesses eased over the past three months and demand increased, on balance,” the Fed said. “Banks that eased their (commercial and industrial) lending policies generally cited increased competition for such loans as an important reason for having done so.”
Analysts viewed the report as a modestly bullish signal on the US economy that indicated that benefits of Fed bond-buying program, known as quantitative easing, were steadily trickling into the economy.”
Macro and Other Market Musings: Is the Fed’s Able to Offset Austerity? Insights from the Employment Report
“The April employment report came out today and is better than expected. The number of new jobs exceeded the median forecast, the previous two months job numbers were revised upward, and the unemployment rate fell to 7.5%. This report is not what one would expect if fiscal austerity were overwhelming the Fed’s efforts to shore up the economy. But the report also is not what one would expect if the Fed were unloading both barrels of the gun at the economy. The April employment rate, therefore, reveals both the strength and weakness of the Fed’s efforts.”
The Fed dials the wrong unemployment number | Gavyn Davies
“he Fed will have a bias to keep policy aggressively easy long after the unemployment rate has fallen below 6.5 per cent, and even after it has fallen below the estimated natural rate of 5.25 to 6 per cent, provided that the inflation threshold is still intact. This is because the reserve army of disguised unemployed people will exert a downward force on inflation which will not be correctly picked up by the official unemployment statistics. In a nutshell, when official unemployment is reported to be (say) 4.5 per cent, the genuine rate may still be around 6 to 6.5 per cent. Policy needs to be adjusted for that.”
Martin Feldstein: The Federal Reserve’s Policy Dead End – WSJ.com
“The Federal Reserve recently announced that it will increase or decrease the size of its monthly bond-buying program in response to changing economic conditions. This amounts to a policy of fine-tuning its quantitative-easing program, a puzzling strategy since the evidence suggests that the program has done little to raise economic growth while saddling the Fed with an enormous balance sheet.”
A Top Contender at the Fed, Janet Yellen, Faces Test Over Easy Money – WSJ.com
“The next chief of the Federal Reserve will decide when to reverse the easy-money policies of Ben Bernanke, a judgment that could strangle the economic recovery if made too early or trigger runaway inflation if made too late.
The task could fall to Fed vice-chairwoman Janet Yellen, a meticulous and demanding Yale-trained economist, who issued prescient, early warnings about the housing bust. After the financial crisis, she helped focus the Fed on jobless Americans, with policies aimed at stimulating the economy at least until unemployment falls to 6.5%.
Ms. Yellen got interested in economics in college. While an undergraduate at Brown University, she was impressed with a talk by visiting Yale professor, James Tobin, who would later win a Nobel Prize in economics. She decided to pursue an economics Ph.D. at Yale, where her interest in unemployment grew while working with Mr. Tobin, her mentor and dissertation adviser.
Mr. Tobin, a child of the Depression and an adviser to presidents John F. Kennedy and Lyndon B. Johnson, emphasized the human toll of high unemployment and the government’s obligation to combat it.”
Brad DeLong : Moby Ben, or, The Washington Super-Whale: Hedge Fundies, the Federal Reserve, and Bernanke-Hatred
“There is a reason that the trade of shorting the bonds of a sovereign issuer of a global reserve currency in a depressed economy is called “the widowmaker”.”
Fed Maps Exit From Stimulus – WSJ.com
“Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations.
Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated.”
Stocks cautious on Fed tapering talk – FT.com
““Many asset managers believe that the Fed will not let them down by ending QE too rapidly (let alone actually tightening),” said Steven Englander, global head of G10 FX strategy at Citi.
“The problem is that if employment growth is 200,000 plus and there is a Fed consensus to taper back, there could be damage both to bond and asset markets.””
Some quick thoughts on quantitative easing and zero rate policy
I am not a fan of quantitative easing or zero rates. I think that is clear from my posts over the past 4 years. Nevertheless, I do like to link out to posts that put QE and zero rates in a more favourable light because we need to get a comprehensive view of the situation to better understand what these policies mean for the US economy, interest rates and asset markets.
Below are a number of links on what is happening with the Fed, with Fed policy and regarding the picking of the next Fed chairman. These links have a wide range of diverging opinions on Fed policy and they are all coming out right now, I believe, because we are at a critical juncture in the Fed’s monetary policy actions. On three levels, the Fed may be poised to change.
The first change is in leadership, with Ben Bernanke commonly understood to be bowing out after this term. Janet Yellen is thought to be the most likely successor and so many people are scrutinizing her previous policy statements to get a fix on how she might be different from Bernanke. My general sense here is that she generally errs on the side of employment over inflation at this point in time. I also believe she is very attuned to the risks of monetary policy on asset prices and reaching for yield despite her present pro-employment bias. Overall, I think this means zero rates will continue for some time, with a tapering of QE beginning sometime mid-year. And I don’t believe she is appreciably different enough from Bernanke that it is going to matter. I like her forthrightness and quote from her speeches when I can because, of all the Fed governors, she most boldly reflects upon both the risks and rewards of Fed policy. (see here, here and here for example)
The second change is in QE. As I wrote above. I don’t see QE ending until at the end of the year. From what I have seen, the numbers do not add up to an unambiguously positive economic picture. And that means the reasons for QE remain in place. The problem in my view is asset market froth, particularly in bond markets where private portfolio preferences have moved to higher yielding and riskier asset classes. I believe the Fed is concerned about this and will look to taper asset purchases as soon as they can, depending solely on the pace of economic growth. If the key numbers like jobless claims, unemployment and GDP come in fine between now and June (with 330k average new jobless claims, +200k on non-farm payrolls, and +2% real GDP growth), then tapering can begin in June already. If any of these numbers is weak, we could see a delay.
I expect tapering sometime this year though because the Fed is concerned about asset markets. We would have to see a complete collapse in growth not to get tapering sometime this year.
The last change is interest rate policy. And this is going nowhere. I call the zero interest rate policy permanent zero for a reason. There is no indication that inflation is a problem and the economy simply is not firing on all cylinders. Moreover, Fed governors haven’t even hinted that they are considering interest rate hikes. It is clear from Fed talk that they are talking more about QE exit paths and reducing excess reserves than about raising rates. Therefore, I would expect both QE and excess reserve policy to precede any rate increase, making zero the policy rate for the forseeable future.
What does all this mean? First and foremost, to me, it means that zero rates will probably be the policy stance of the Fed when the next cyclical downturn occurs. And that therefore means that unconventional policy tools will maintain primacy in monetary policy initiatives. The question then will be about credit growth, non-performing loans, writedowns and the like because net interest margins will be non-existent in that environment and I think that means serious balance sheet problems for some banks that get caught out playing the ‘reaching for yield’ game.
You know what my thoughts here are. So I am not going to go over that. Instead I urge you to read the pieces below for a different perspective.
Cheers.
Edward
Fed sees easing in bank lending standards, loan demand up | South China Morning Post
“Banks eased lending standards to US businesses over the last three months as competition intensified and loan demand advanced, the Federal Reserve said, improving odds that ultra-low interest rates will be passed on to borrowers.
The findings of the US central bank’s quarterly senior loan officers survey, which provides a detailed dispatch from the front lines of the US economy, were broadly in line with other indicators showing steady, but still gradual growth.
“The survey results generally indicated that banks’ policies regarding lending to businesses eased over the past three months and demand increased, on balance,” the Fed said. “Banks that eased their (commercial and industrial) lending policies generally cited increased competition for such loans as an important reason for having done so.”
Analysts viewed the report as a modestly bullish signal on the US economy that indicated that benefits of Fed bond-buying program, known as quantitative easing, were steadily trickling into the economy.”
Macro and Other Market Musings: Is the Fed’s Able to Offset Austerity? Insights from the Employment Report
“The April employment report came out today and is better than expected. The number of new jobs exceeded the median forecast, the previous two months job numbers were revised upward, and the unemployment rate fell to 7.5%. This report is not what one would expect if fiscal austerity were overwhelming the Fed’s efforts to shore up the economy. But the report also is not what one would expect if the Fed were unloading both barrels of the gun at the economy. The April employment rate, therefore, reveals both the strength and weakness of the Fed’s efforts.”
The Fed dials the wrong unemployment number | Gavyn Davies
“he Fed will have a bias to keep policy aggressively easy long after the unemployment rate has fallen below 6.5 per cent, and even after it has fallen below the estimated natural rate of 5.25 to 6 per cent, provided that the inflation threshold is still intact. This is because the reserve army of disguised unemployed people will exert a downward force on inflation which will not be correctly picked up by the official unemployment statistics. In a nutshell, when official unemployment is reported to be (say) 4.5 per cent, the genuine rate may still be around 6 to 6.5 per cent. Policy needs to be adjusted for that.”
Martin Feldstein: The Federal Reserve’s Policy Dead End – WSJ.com
“The Federal Reserve recently announced that it will increase or decrease the size of its monthly bond-buying program in response to changing economic conditions. This amounts to a policy of fine-tuning its quantitative-easing program, a puzzling strategy since the evidence suggests that the program has done little to raise economic growth while saddling the Fed with an enormous balance sheet.”
A Top Contender at the Fed, Janet Yellen, Faces Test Over Easy Money – WSJ.com
“The next chief of the Federal Reserve will decide when to reverse the easy-money policies of Ben Bernanke, a judgment that could strangle the economic recovery if made too early or trigger runaway inflation if made too late.
The task could fall to Fed vice-chairwoman Janet Yellen, a meticulous and demanding Yale-trained economist, who issued prescient, early warnings about the housing bust. After the financial crisis, she helped focus the Fed on jobless Americans, with policies aimed at stimulating the economy at least until unemployment falls to 6.5%.
Ms. Yellen got interested in economics in college. While an undergraduate at Brown University, she was impressed with a talk by visiting Yale professor, James Tobin, who would later win a Nobel Prize in economics. She decided to pursue an economics Ph.D. at Yale, where her interest in unemployment grew while working with Mr. Tobin, her mentor and dissertation adviser.
Mr. Tobin, a child of the Depression and an adviser to presidents John F. Kennedy and Lyndon B. Johnson, emphasized the human toll of high unemployment and the government’s obligation to combat it.”
Brad DeLong : Moby Ben, or, The Washington Super-Whale: Hedge Fundies, the Federal Reserve, and Bernanke-Hatred
“There is a reason that the trade of shorting the bonds of a sovereign issuer of a global reserve currency in a depressed economy is called “the widowmaker”.”
Fed Maps Exit From Stimulus – WSJ.com
“Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations.
Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated.”
Stocks cautious on Fed tapering talk – FT.com
““Many asset managers believe that the Fed will not let them down by ending QE too rapidly (let alone actually tightening),” said Steven Englander, global head of G10 FX strategy at Citi.
“The problem is that if employment growth is 200,000 plus and there is a Fed consensus to taper back, there could be damage both to bond and asset markets.””