Wednesday, September 18, 2013
Fed Monetarists Dig In: No Taper
This is their story and they're sticking to it.
Reads like they have picked up on the economic weakness we've experienced due to the sequester cuts which kicked in since their last meeting in June and have their so-called "tightening" on hold again for now.
Recent fiscal data indicates that the major impact of these cuts for FY 2013 have ended since about mid-August. The brunt of these $40B+ of cuts for this FY showing up in the data for June, July and through about mid-August.
If we can get through the FY 2014 fiscal process without having to deal with further cuts than those already in the FY 2014 OMB projections we should be back on the "muddle through" track and looking at the dreaded "taper" probably again at the Fed's next meeting.
There has to be a better way to run a railroad...
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12 comments:
IMO, they can never taper--or at least no more than $10-20 billion before the implosion commences with a vengeance.
That's a possibility. Maybe purchases of a few tens of billions of financial assets each month + ZIRP will just evolve into a permanent part of Fed operations.
Dan,
I'm probably alone, but I don't have a problem with the scenario you paint. It's not enough though. We still need aggressive--non austerian- fiscal policy to work in tandem with QE. Then maybe Main Street will catch a semblance of a break. But, however it manifests itself, the little people need a BIG helping hand. At least equal to what the 1% received.
For example, open market operations began in the 20's as an emergency recession-fighting measure. But they quickly evolved into a routine part of Fed operations.
If QE is continued over time, MG, then any stimulative effect it might ever have had disappears. The assets the Fed purchases are roughly equal in value to the dollars it emits to purchase them, so eventually you just have as many dollars flowing into the Fed from the QE portfolio as as flowing out from the purchases.
Dan,
Is that pretty much what's taking place in Japan?
QE is only stimulative to the extent it lowers interest rates via supply and demand. It is pretty hard to see much of an effect on bond yields from supply effects; the main determinant is the expected path of short rates. QE acts as a signaling device, but the Fed can signal just by giving speeches.
Mal,
This QE is doing nothing at best... all it does is remove interest income from the non-govt... and raise interest rates which doesnt help the net liability cohort...
IMO you are on it with fiscal policy as the operative policy channel...
on the fiscal side based on the data I follow the worst of the sequester is behind us and (again assuming no GOP hijinks) we should firm up a bit come October with the start of the new FY and raising of the "debt ceiling, after that, $NFA flows should increase a bit and we may get above a 2% GDP growth again...
Also 'monetary policy' should also become more favorable as then the UST can again start to net issue USTs to the public and the Fed's influence on bond prices should wane and we will get lower mortgage rates again and maybe housing can resume its recovery...
the Fed's influence on lowering bond prices and raising rates was strengthened ever since we hit the debt ceiling again in May... ever since then you can look at the charts and see rates go straight up... this should still continue now as we still have no "taper" and still no increase in the "debt ceiling"... so we are stuck with these higher rates until the UST can again net issue to the public and the Fed can no longer "corner the market" for govt bonds...
rsp,
Currency reserves created by the Fed to purchase Treasuries, MBS and Agency debt have for the most part just come right back to the Fed in the form of over night excess reserves.
Point is that QUANTITATIVE EASING is much ado about little and more of a rain dance than anything else to make it appear that the Fed is still relevant and doing something important.
As Warren Mosler has said, at best QE is just a placebo and at worst it is subsidy to hedge funds and bank traders and probably more deflationary than anything else because it is draining about $100 billion or more of interest income from the real economy.
Since the outset, market participants have looked at QE and concluded that the Fed is printing money and hence creating inflation. The Fed has even said that they were doing QE to raise the inflation rate. Hence traders go for the RISK ON trade sell the $ and sell Treasury bonds and/or buy risk assets like equities commodities and credit related instruments.
When QE ends traders do the reverse, i.e. RISK OFF. Just look at the charts. Without exception despite all the narrative to the contrary, Treasury yields have risen sharply higher when the Fed has commenced QE and after QE1 & QE2 were concluded yields crashed sharply lower.
However, the pattern changed today because Treasuries rallied sharply with the FOMC NO TAPER vote. I think this is because the Fed downgraded the economic outlook. This may mean that equities have seen their high water mark for the near term.
This madness will not stop until the central bank decides to target a yield curve.
Or we stop issuing government bonds.
Whichever comes first.
"This madness will not stop until the central bank decides to target a yield curve."
Neil - Isn't that what the Fed tried to do with Operation Twist?
08/31/11 Fed action may return to “Operation Twist”, says Rombach….. http://reut.rs/qBxbil
9/19/11 Fed should aim really long on yield curve, says Rombach…. http://reut.rs/q7oVr1
That's not how the guy running the operation described it Ed:
"We are looking to get the best price we can for the taxpayer,” said Mr. Frost, a buttoned-down 34-year-old in a striped suit and rimless glasses."
http://www.nytimes.com/2011/01/11/business/economy/11fed.html?pagewanted=all&_r=0
So I have to agree with Neil, they appear not to be targeting anything other than getting lower prices...
Unless this guy is lying... (???)
He is either lying about what he is doing here and in reality doing what you assert, or they are all morons and one hand doesnt know what the other is doing... I will assert the latter....
We see this backup in rates again in the 10 yr rate since we hit the 'debt ceiling' in May and the Fed still buys 45b per month even though Treasury cannot net issue...
rsp,
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