Some commentators and analysts have lauded the Fed’s Tuesday decision to begin reinvesting more than $150bn in annual proceeds from maturing mortgage-backed and agency securities into Treasury debt.
But others echo the suggestion of the FT’s Lex column, to not waste any time “nit-picking over the Fed’s language” and instead, “look at the bigger picture”.
“As ever”, concludes Lex, “investors are best advised to keep their own counsel and stay diversified”.
The New York Times warns that the Fed could face a tougher decision later this year on whether to pump more money into the economy, while DealBook notes that “normal is a long ways off”.
Some commentators, were more — err, excitable, notably Paul Krugman who led his blog post on Wednesday with the line: “The Fed’s current policy is grossly inadequate, logically bizarre, and slightly — but only slightly — encouraging.” He added:
What the FOMC announced was a slight change in policy: rather than allowing its balance sheet to shrink as the mortgage-backed securities it owns mature, it will maintain the balance sheet’s size by reinvesting the proceeds in long-term government bonds. Roughly speaking, it has gone from a completely crazy policy of monetary tightening in the face of massive unemployment and incipient deflation, to a policy of standing pat in the face of same. Whoopee.
Overall, as Steve Russolillo at MarketTalk summed up on Wednesday, the reaction in the blogosphere was “relatively neutral” towards the Fed’s move.
While the FOMC’s decision garnered a “somewhat positive reaction” in the stock market, many market watchers believe the Fed could have done more this time around to propel the economy, he added.
Indeed, in his daily commentary, Morgan Stanley economist Gerard Minack describes the Fed’s decision as a move to prevent “even a passive reduction in quantitative easing as its already-purchased mortgage-backed securities are paid down”.
The upshot, in his view, is a “double-edged sword, with the bear edge sharper than the bull edge”. The sum is trivial; it’s the symbolism that matters, he adds, noting :
If this is a symbol of the Fed’s worry about the strength of recovery, it’s not sending a good signal for risk assets.
Market chatter about prospects for the Fed’s decision may have given equities their recent resilience in the face of soft US macro data, while at the same time pushing Treasury yields lower, he notes.
While a $20bn re-allocation of a $2,300bn asset pool is not of itself important, the Fed’s decision has to be seen as a signal that it’s ready to do more QE if required.
That may be important. But ultimately, says Minack, it all “unfortunately points to more of the meat-grinder markets seen through this year”. He concludes:
Our highest conviction calls in this environment are relative trades – EM over DM, quality equities, Europe over Japan – rather than market-directional calls.
The folks at bond-fund giant Pimco, however, see it as all good for risk assets.
Pimco’s Anthony Crescenzi told Bloomberg on Wednesday, that the Fed’s decision to buy Treasuries and keep interest rates low will support “risk assets” without bringing down unemployment:
“Low volatility tends to be good for the interest-rate climate,” said Crescenzi. “It does push investors out the risk spectrum generally. That tends to be good for risk assets.”
Hong Kong-based Gavekal, meanwhile, asks whether the Fed went far enough.
In its Wednesday note, Gavekal research house:
Since the end of March, the Fed’s outstanding credit to the private sector has begun a slow path of contraction – and the recent policy change does not change this one bit; it simply now reinvests in claims on the public sector. The result is that the Fed’s balance sheet and the monetary base will not contract as previously destined, but if neither commercial bank lending nor velocity is stimulated, this preservation of base money will do nothing to counter the decline of Fed credit to the private sector… and thus nominal GDP growth will be hampered.
That is why, in Gavekal’s view, the Fed “may soon have to buy more claims on the private sector”.
It concludes:
All in all, we have our doubts that this move alone will be enough to keep the US out of a deflationary environment. Perhaps this is why the yen (the world’s favorite currency during deflationary scares) is so strong today, while the euro has already given up yesterday’s gains. The Fed may need to do more; namely, it may need to buy more private-sector debt.
Nomura’s global economics team, meanwhile, is full of praise for the Fed, noting on Wednesday that with short term interest rates “already at de minimus levels, the only course of action for the Fed to reinforce this change in language was to focus on the size of its balance sheet”.
It says in a client note:
We applaud the Fed for taking this action… [its] primary goal in doing so is to restore confidence and forestall a self-fulfilling degeneration of expectations about growth and inflation. This action serves as a reminder that even though interest rates lie essentially at their lower bound the Fed has other tools to promote growth and prevent deflation. Moreover, its decisive actions leave little room to doubt that policymakers stand ready to “employ its policy tools as necessary to promote economic recovery and price stability.”
Over in Tokyo, Macquarie’s Asia economist Richard Jerram says the Fed’s move reminds him of the “incremental policy shifts” by the Bank of Japan over the last decade — and reminds us of how flatly such shifts fell on markets. He writes on Wednesday:
There are echoes of BOJ policy from 2001-04 in the Fed’s move. The BOJ made repeated incremental policy shifts, but struggled to explain why they were necessary or how they would affect financial markets or the real economy. There is a worryingly similar lack of clarity from the Fed.
Meanwhile, on the outlook for the dollar, CBA’s chief forex strategist Richard Grace sees the Fed’s move as a “Bank of England style of quantitative easing policy, keeping the level of securities held constant”.
Adjustments mean that long-term US bond yields will fall, as the US dollar is more sensitive to movements in two-year yields than the 10-year yield, he notes.
Ultimately, however, there are limited implications for the US dollar from the FOMC’s announcement and CBA’s currency forecasts remain unchanged.