While the recent data have pushed the Fed’s QE withdrawal timetable out, the latest Fed statements indicate a level of hawkishness on tapering QE that we haven’t seen in the last few weeks. This jobs report is shaping up to be a key data point in Fed decision making.
Three Fed Governors spoke about monetary policy yesterday and they all were fairly hawkish about the timetable for tapering. Let me run down their comments and add a few of my own.
First there was the always hawkish Esther George, head of the KC Fed. She was quoted by the Wall Street Journal as saying that some markets are addicted to cheap money. The Wall Street Journal did not specify specific markets. I imeediately thought of high yield, leveraged loans and mortgage-backed securities (as you will see in the links post). But I had no idea what her thinking was. So I had a look on the KC Fed website and found the speech that she gave today with the reference to cheap money (pdf link here). Here is the quote (with emphasis added):
These unconventional actions also bring their own uncertainty about the outlook for the economy and increasingly appear to be viewed by markets and the public as “conventional.” As a result, several sectors in the economy are becoming increasingly dependent on near-zero short term interest rates and quantitative easing policies. For example, debit balances in security margin accounts at broker-dealers hit an all-time high in April of this year. The rise in these balances indicates that investors are borrowing at very low rates of interest to purchase riskier financial assets. Presumably, some investors are pursuing this strategy because they anticipate that loans will continue to be available at very low rates of interest, which will allow them to ride out any market volatility. Likewise, an extended period of low rates is causing investors to be more aggressive about seeking out higher-yielding and riskier assets in the leveraged loan market. Leveraged loans are packages of higher-risk commercial loans, which hit an all-time high in the first quarter of this year.
[…]
Given these dynamics, and in light of improving economic conditions, I support slowing the pace of asset purchases as an appropriate next step for monetary policy. Moreover, such actions would not constitute an outright tightening of monetary policy, but rather, it would slow policy easing. History suggests that waiting too long to acknowledge the economy’s progress and prepare markets for more-normal policy settings carries no less risk than tightening too soon.
Her views here are not unexpected but it is important to note why she has taken this position.
Then there was the San Fran Fed’s head John Williams. The Wall Street Journal wrote that he was “open to trimming bond purchases“. His comments were not in a speech on the SF Fed’s website but rather came via sideline comments to reports. The WSJ quotes him this way:
“If the forecast goes as I hope and we see continuing good signs from the labor market [and] overall economic conditions [and] continued confidence in that forecast of substantial improvement, I could see, my own view is that as early as this summer [there could be] some adjustment, maybe modest adjustment downward, in our purchase program,” San Francisco Fed President John Williams told reporters on the sidelines of a conference here.
Generally, Williams has been dovish. So his timetable of “as early as this summer” is a bit aggressive compared to what you would expect true doves to be saying. It suggests that he supports tapering in the next month or two if the economic data support this.
Finally, we got some views from Atlanta Fed head Dennis Lockhart via an interview. He was more coy about timing:
“Whether that’s June, August, September or later in the year, to me, isn’t really the issue. It’s the issue for the markets.”
My read: we could taper this summer but then again maybe we will not. It all depends on the data. Nonetheless, the fact that he mentioned a few near months in his comments does suggest that the discussion around tapering is weighted toward a summer tapering if the data are good, just as Williams has said.
Does this really matter though? After all, QE is not an interest rate-targeting program. It has no direct effect on interest rates. It only affects rates and asset values by shifting private portfolio preferences. So if the Fed buys $45 billion of MBS or $10 billion really is irrelevant. I see this as more a signalling effect about policy stance than anything else.
I agree with Tim Duy:
“Bottom Line: Fed is looking to pull back on asset purchases. They expect the data to give them room to do so.”
Watch the jobs number on Friday. A big number, say 200,000+ on non-farm payrolls and a fall in unemployment will mean tapering is more likely to occur during the summer. And since the jobs picture is the one that the Fed is targeting, I would consider summer tapering a lock with that kind of data flow.
A change in tone at the Fed on tapering
While the recent data have pushed the Fed’s QE withdrawal timetable out, the latest Fed statements indicate a level of hawkishness on tapering QE that we haven’t seen in the last few weeks. This jobs report is shaping up to be a key data point in Fed decision making.
Three Fed Governors spoke about monetary policy yesterday and they all were fairly hawkish about the timetable for tapering. Let me run down their comments and add a few of my own.
First there was the always hawkish Esther George, head of the KC Fed. She was quoted by the Wall Street Journal as saying that some markets are addicted to cheap money. The Wall Street Journal did not specify specific markets. I imeediately thought of high yield, leveraged loans and mortgage-backed securities (as you will see in the links post). But I had no idea what her thinking was. So I had a look on the KC Fed website and found the speech that she gave today with the reference to cheap money (pdf link here). Here is the quote (with emphasis added):
Her views here are not unexpected but it is important to note why she has taken this position.
Then there was the San Fran Fed’s head John Williams. The Wall Street Journal wrote that he was “open to trimming bond purchases“. His comments were not in a speech on the SF Fed’s website but rather came via sideline comments to reports. The WSJ quotes him this way:
Generally, Williams has been dovish. So his timetable of “as early as this summer” is a bit aggressive compared to what you would expect true doves to be saying. It suggests that he supports tapering in the next month or two if the economic data support this.
Finally, we got some views from Atlanta Fed head Dennis Lockhart via an interview. He was more coy about timing:
My read: we could taper this summer but then again maybe we will not. It all depends on the data. Nonetheless, the fact that he mentioned a few near months in his comments does suggest that the discussion around tapering is weighted toward a summer tapering if the data are good, just as Williams has said.
Does this really matter though? After all, QE is not an interest rate-targeting program. It has no direct effect on interest rates. It only affects rates and asset values by shifting private portfolio preferences. So if the Fed buys $45 billion of MBS or $10 billion really is irrelevant. I see this as more a signalling effect about policy stance than anything else.
I agree with Tim Duy:
Watch the jobs number on Friday. A big number, say 200,000+ on non-farm payrolls and a fall in unemployment will mean tapering is more likely to occur during the summer. And since the jobs picture is the one that the Fed is targeting, I would consider summer tapering a lock with that kind of data flow.