Fed mulls perma-QE

From the Boston Federal Reserve:


During the onset of a very severe financial and economic crisis in 2008, the federal funds rate reached the zero lower bound (ZLB). With this primary monetary policy tool therefore rendered ineffective, in November 2008 the Federal Reserve started to use its balance sheet as an alternative policy tool when it began the large-scale asset purchases. Now attention is turning to how the Fed should transition back to a more conventional monetary policy stance. Largely missing from these discussions about the Fed’s “exit strategy” is a consideration that perhaps it should retain, not discard, the balance sheet tools. Since the Dodd-Frank Act (DFA) has added maintaining financial stability to the Fed’s existing dual mandate to achieve maximum sustainable employment in the context of price stability, it might be beneficial to have several tools to achieve multiple policy objectives. An additional consideration is that some of these tools may be needed to stem future crises as a result of the DFA’s new limitations on how the Fed can provide liquidity under such adverse circumstances. In an effort to spur a broader debate, this brief discusses what is known and knowable regarding the effectiveness of balance sheet tools and examines four primary arguments for keeping these as part of the Fed’s toolkit.

Key Findings

  • The relative costs and benefits of conventional versus unconventional policy are difficult to know, so appeals to these types of arguments in favor of one type of policy tool are hard to support. In terms of the absolute costs of balance sheet tools, there was a fear that using such tools would engender high inflation or unanchored inflation expectations. Yet after six years, neither result has occurred.
  • Having more than just one primary policy tool confers greater flexibility and may allow the Fed to better fulfill what are now its three policy goals. Moreover, using balance sheet tools to specifically target the sector(s) that are in disequilibrium would let the Fed better focus its policy efforts on the sectors it wants to affect and would diminish some of the potential policy tradeoffs that arise when just one policy instrument is available. Such arguments become even more powerful when the simultaneous objective of ensuring financial stability must be met.
  • In a low inflation environment, the probable frequency and duration of hitting the ZLB may actually be much greater than previously appreciated, and hence the need for having alternative policy instruments may be more critical than before.
  • With the ability to operate more directly on the asset classes and interest rates it would like to see changed, the Fed may be able to better communicate its policy intentions to market participants.

This is the kind of research than can fast track a career. In reality it’s miles behind the curve. A quick glance at Japan can tell you that. But by framing the discussion using today’s conventional assumptions it turns what is a near certainty for the future into a act of prescience.

This is one reason why MB has been so hard on Australian regulator’s refusal to innovate their own monetary policy tools. QE is here to stay and they have no way of dealing with it.


      • And Goldminers!
        All these cheap geologists and mining gear about to flood the market.

        Newcrest anyone?

      • Money is not a commodity, hence the term debasement is in error, which at the end of the day is why monetarists can’t figure out why they constantly wrong – see Greenspan.

  1. If it is such a good idea for governments to print their way out of debt, I cannot understand why this cannot be extended to the general public, to be permitted to print as much as they require also. This gets the money to where it is really needed and leaves those bastard bankers out of the loop.

    • how would this work? are you suggesting everyone start exchanging promissory notes. Isn’t this exactly why banking exist – not everyone has the capacity to do the credit checking element.

  2. QE has been instrumental in rewarding wall st and the rich. Of course the fed want to keep this very, very effective tool. For the rest of the population it allows a glimmer of hope to be maintained that’s about it.

    • It is not all about the Fed or CB’s, its about congress, in the US case, not doing its job or doing its job for their funders – employers.

  3. Hi,
    I often read mentions such as ‘a quick glance at Japan’. Are there any macro business articles that examine Japan’s economy and answer the question of why we should look at it?

    • That was an interesting read flawse. It made me think, I’m seldom right, and throwing in some outlandish assumptions to boot. They say (who? I don’t know, just read it here and there), the U.S Fed is data dependant. Data from employment-unemployment, wages, manufacturing, non-farm payrolls, consumption, export-import, manufacturing equipment sale and purchases,… The Fed will use all this data as some indicator(s) for the economy, and then announce a rate, or the rate.

      Suppose (warning, this is the voice in my deranged head talking) interest rates aren’t having an effect on these things anymore, or making all of the above worse over time. This is what it looks like to me. And over the past few or more years the Fed has flooded the financial sector with tonnes of money (QE), shooting asset prices to Pluto’s orbit and wanted to correct this somewhat.

      Wouldn’t a kind-of margin call on these asset from borrowed money, that is, an interest rate rise be either the option, or in their interest (pun intented) to do so?

      I really don’t know, and I tend to think these things cause nobody know what the future holds. What comes will be another no one saw it coming thing that always happens. And nobody really knows what the Fed is considering, only what they’ve done, or doing.

      • “this is the voice in my deranged head talking”

        Lucis Pleased to see you are one of ‘us’ Now you just need a tin-foil hat!

        I see the Fed as some sort of mad juggler with a myriad of balls in tehe air. It doesn’t realise a couple of those balls are made of lead (or gold perhaps).
        Yes – the only certain outcome is ‘hoocoodanode?’

  4. The implicit structure underlying this paradigm is that the west, the US will remain the global economic hegemony. Consider if the US were to suddenly find itself and its currency not simply massively depreciated, but vastly under valued relative to a rival.

    All of a sudden these policies are no longer constructive but seriously destructive as the notion of wholesale money printing which is seen as fine and dandy amongst an economic hegemony is shifted to being seen as profoundly destructive on the currency value as it would were any other country to do it.

    If faith is lost in the US and a transition is made to gold backed then all of this money printing will come home to roost and the US will be gutted. However more likely is a global basket of currencies which would immediately have the same effect.

    However the most danger comes from a Chinese SHIFT from exporter to consumer as this would also entail a MASSIVE APPRECIATION o f their currency to allow the average workers to start consuming.

    An huge increase in the yuan would also allow them to start purchasing commodities at cents on the dollar, and even more importantly purchasing commodity producers at cents on the dollar – including Wine, Cheese, what ever.

    This process has ALREADY started and will accelerate – I guess that we may see this becoming more mainstream around the lead up to the US election which will place massive pressure on the campaign and force them into making even more mistakes.


    • Good logic but I don’t see it happening that fast. The US is still highly innovative but the AIIB is China using some of its foreign reserves before they become worthless I assume.

  5. ceteris paribus

    Stop Press: BHP pays effective tax rate of 0.002% on $5.7 billion of profits booked in Singapore. Ain’t crony capitalism grand, while people suffer from lack of access to health services, vital drugs and vaccines, clean water, adequate nutrition, education, equal opportunity etc. etc.

    • Yeah and none of your kids are being employed in these nice cushy well paid and skilled office jobs that Sing has negotiated!

      • ceteris paribus

        Don’t quite know what you mean but I am proud to say that my children are employed in true service industries: medical research (pure medical research- he has knocked back lucrative offers from big pharma companies) and teaching.

        Their values are gold.

    • I’m saying good skilled jobs in the mining industry have been needlessly outsourced to a very expensive country .

    • I wasn’t going to as i consider this a bit of a diversion from the more technical nature of the post. However contained within this is the notion that the US can go on printing forever; that the world will just keep accepting and keeping the USD bits of paper as reserves forever.
      As I commented in Weekend Links my timing is generally hopeless. Nevertheless Glenn is absolutely correct. We hear so often that China needs to make its economy more consumer oriented. I’ve said almost equally as often that anyone who knows China reasonably well knoiws that process has been going on, in earnest, for 15 years. Note my post elsewhere today re wages in China.
      Bill is also sort of correct. However make no mistake the ordinary Chinese people are, justifiably, proud of their achievements over the last 25 to 30 years. Further they are quite nationalistic and, as one Taiwanese friend said to me some 12 years ago “The Chinese people want the good life too – just like you!” Why shouldn’t they have it! They;ve worked for it and saved and invested while we, almost all western nations, have embarked on a road of national profligacy.
      There are now many moves afoot across the whole world to remove the USD as the SOLE reserve currency. The AIIB is just one of them. Further the Chinese do think long term and are not confined by our myopia of only considering ‘what we can get away with’ for the next three months.

      The inanity of assuming that, for the next 40 years, the world is going to be the same as the last forty years with China et al existing just to supply us with cheap goods in exchange for worthless bits of paper is just mind – boggling. Yet that is exactly what our policy makers and economists, especially the academics, do.
      Best we all just go back to sleep. The answers lie back in time.

      • HInt… the US government is not printing money e.g. QE is dead money aka reserves, even Treasuries are not the same as before.

        Skippy…. good grief…. monetarist will never learn… cognitive impediment due to a false set of qualifiers and comported to esoteric dicta.

  6. Some junkies kick the habit.
    Most don’t.

    Can’t see the Fed putting Wall Street through rehab in an election year.

  7. The US govt is paying out 7.5% of tax receipts to fund interest on their debt now paying about 1.25% interest

    Using the Fed bullshit projections of 3% funds rate (3.75% average borrowing rate) the government will be losing 20%+ of their tax receipts to service debt.

    They are either lying and/or incompetent

    I propose both.

    BTW: Japan is at 40% with 0.40% borrowing costs

    When the Central Banker fascination and trust goes out the window – some very bad things are going to happen to leveraged investors – but until then, Party On Wayne….