Eric Rosengren, the President of the Federal Reserve Bank of Boston, gave a speech in Frankfurt on Thursday arguing that the Fed’s full employment mandate gave the central bank more flexibility to be aggressive earlier, and that open-ended programmes that are tied to economic targets are more effective than purchases of predetermined size and duration.
Nothing novel there. But his speech also contained, perhaps inadvertently, some interesting arguments that the rounds of bond-buying after the acute phase of the financial crisis did little for the real economy. (We covered the tenuous relationship between asset purchase programmes and inflation here.) Read more
The Fed’s balance sheet is no longer in expansion mode, which means it’s time for post-mortems of the most recent asset purchase programme. (Our colleague John Authers has a very good round-up of what did and didn’t happen since QE3 began.)
We want to focus on the fact that the most recent round of bond-buying seemed to have no inflationary impact. If anything, an observer of the data who had no preconceptions about monetary policy operations would conclude that QE3 was disinflationary. Alphaville writers have been exploring this possibility for years (though without firm conclusions).
Let’s start by looking at the changes in actual inflation since the start of 2010. Read more
Yes, yes, this QE ain’t the last QE and heaven knows the outcomes aren’t straightforward and depend on a shed load of variables. But a comparison is always worthwhile — or, at least, fun. So, here’s a relatively straightforward one from Deutsche Bank’s Alan Ruskin comparing the effects of QEs 1, 2 and 3.
First on the dollar index (try to spot the profit taking before the downward trend resumes): Read more
We’ll be back later with a proper preview of next week’s FOMC meeting, but for now here is something to argue about:
1. QE1 was more effective than QE2. Read more
This is how Goldman Sachs sees the UK economy in the next few months:
We now expect an outright recession in the UK, with two consecutive quarters of -0.1%qoq growth in 2011Q4 and 2012Q1 (where previously we expected marginally positive growth in these quarters). The changes, together with lower growth in 2012Q2, have reduced our 2012 annual GDP forecast from +1.3%yoy to +0.7%yoy.
To our inbox this morning came a note from RBC arguing that the FOMC statement last week acted as a kind of “Anti-Stimulus”.
Here’s the explanation: Read more
There was no press conference with Ben Bernanke after the August 9 FOMC statement or following his Jackson Hole speech — and there won’t be another until
after Congress pays attention and starts pulling its weight around here November 2.
But don’t fret, economists at Goldman Sachs are taking questions. Read more
The hypothetical QE3, whatever its format, might not work so well because the last two rounds were so successful.
That’s what Goldman analysts Sven Jari Stehn and colleagues say. Read more
Alternative working title: How QE2 went wrong.
In order to understand what’s really at stake at Jackson Hole on Thursday we need first to understand how the Fed’s thinking has evolved post 2008. Read more
Given that it’s the question of the hour…
The US economy, says Nomura’s Paul Sheard, is not looking anything like Japan in the early- to mid-1990s. Read more
Even from this correspondent’s vacation spot on a rustic Swedish island did he notice how carefully the FOMC’s last statement was scrutinised.
And frankly, we’re bored of reading about the potential efficacy of the ideas floated by the Fed as available tools to combat a protracted downturn. You might categorise those as QE2.whatever: exceptionally low rates through 2013, lowering interest on reserves, increasing the average maturity of its holdings. Ditto for the notion of a conventional QE3 (more large scale asset purchases). Read more
Hope springs eternal in the investment banks.
Tuesday’s FOMC statement drew attention for its commitment to 0 – 0.25 per cent rates until at least mid-2013. This led to the less than sudden realisation that holding (some) stocks was more attractive than nursing the corpse of a 2-year bill. More operation shout than operation twist; the front-end of the yield curve is all but locked down for the forseeable future. Read more
US stocks ended their bear run on Wednesday but it was tin hat time again on Thursday morning.
The minutes of the last MPC meeting are out and here’s the price action in the Great British Krona.
Macro Risk Advisors, headed by Dean Curnutt, are specialists in derivatives strategy. One of their chief occupations is thus evaluating risk and volatility.
Given that, it’s probably fair to say they’re in a good position to comment on matters “systemic risk” related. Read more
The minutes from the US Federal Reserve’s June meeting show there is some interest in monetary stimulus if economic growth remains weak, marking the Fed’s first serious discussion of easing since the US economy hit a “soft patch” in the spring. “Some participants noted that, if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate, and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation,” the minutes said. Further monetary action would be likely to mean more quantitative easing, aimed at driving down long-term interest rates. However the minutes also show a deep divide among the FOMC members. While some thought that weak growth might create a need for further easing, others thought that slower growth and higher inflation suggest “that there might be less slack in jobs and product markets than had been thought”.
From the annals of financial repression, we bring you Libor rates.
It’s a torrid tale of QE2, dollar funding and liquidity — and it’s one we thought we’d mention, given that the Federal Reserve’s second bout of quantitative easing has just come to an end. Read more
The last QE2 open market operation: $12.47bn of Treasuries tendered by primary dealers, $4.91bn accepted by the Fed, $4.4bn of which was yesterday’s new seven-year bond.
As highlighted in FT Alphaville’s tombstone (data via Reuters): Read more
The rally in Treasury prices has come juddering to a halt just as the Federal Reserve’s asset purchases come to an end on Thursday, the WSJ reports. Ten-year Treasury yields reached 3.11 per cent after low demand in a seven-year auction on Wednesday, suggesting that primary dealers are unlikely to bid aggressively now that the Fed is unable to take unwanted paper. The central bank absorbed 85 per cent of net Treasury issuance in the last eight months, say Morgan Stanley economists. Pimco’s Bill Gross believes that the Fed could signal a return to markets as early as August, but few believe it possesses the ammunition, or willpower, for QE3, Reuters says.
The Federal Reserve will remain the biggest buyer of Treasuries, even after $600bn second round of quantitative easing ends this week, Bloomberg says. The Fed will continue to buy Treasuries with proceeds from the maturing debt it currently owns to keep interest rates low, which could mean purchases of as much as $300bn of government debt over the next 12 months without adding money to the financial system.
The Bank of England governor is a rule-breaker, just like Argentinian football star Diego Maradona.
So says Malcolm Barr over at JPMorgan: Read more
Apologies for the public school levels of surname chicanery in the title but a couple of big hitters have weighed in before the Fed Chairman’s special appearance on US Markets Live on Wednesday.
Richard Koo, chief economist at Nomura Research Institute and analyst-in-chief of “balance sheet recessions“, writes in his latest note that the Fed’s lack of options today is reminiscent of the BoJ’s predicament a decade ago. Read more
To the minutes of the last Bank of England Monetary Policy Committee meeting…
… specifically paragraph 25 where the majority view is discussed: Read more
And it’s all because of one little speach by Daniel Tarullo. The Federal Reserve Board governor took to the Peterson Institute stage on Friday to recommend that systemically-important financial institutions (SIFIs) increase their capital ratios by 20 per cent to 100 per cent over their current levels. Read more
Nobel Prize winner Peter Diamond said on Sunday he planned to withdraw as a nominee for Federal Reserve governor, after his nomination was repeatedly opposed by Republicans, Reuters reports. Diamond, in a New York Times op-ed, says Republican critcism is “a failure to recognize that analysis of unemployment is crucial to conducting monetary policy.” Diamond’s withdrawal, a recognition that Republican objections could not be overcome despite three committee votes approving him, leaves the White House with two vacancies to fill on the seven-seat Fed board as the central bank debates what to do about a weak economic recovery after its $600bn bond buying programme ends this month.
We ♥ this note from Bank of America Merrill Lynch’s Ruslan Bikbov and Priya Misra.
It’s on a subject dear to our own hearts here on FT Alphaville — the curious case of persistently low volatility and the idea that it might be masking systemic risk. It also weaves together a plethora of other themes — massive short volatility positions, search for yield, correlation, LTCM — we’ve touched on. Read more
The Bond Buyer has a story on Thursday highlighting strong demand for tax-exempt municipal bonds, which despite recent tightening are still trading at above 100 per cent of comparable US Treasuries at the long end of the yield curve.
The “magic” 5% tax-free yield is sustaining strong demand from retail investors. Read more
Still pondering possible reasons behind the recent commodities rout?
Deutsche Bank says it’s all because of the coming QEnding, or the end of the Federal Reserve’s second bout of quantitative easing, scheduled to take place in June. And it makes some sense. Read more
Another missive on the US recovery from the SocGen bear-king Albert Edwards and, uh-oh, paging Ludwig Wittgenstein:
Words fail me
The Federal Reserve has raised its 2011 inflation forecast above its goal, but chairman Ben Bernanke said at his first-ever news conference on Wednesday that price rises would be “transitory”, reports the FT. His comments highlighted the Fed’s efforts to keep policy loose while appearing vigilant on inflation driven by rising oil prices. Bernanke spoke after the rate-setting FOMC confirmed the US will complete its $600bn ‘QE2’ programme of asset purchases in June as planned and revised its economic outlook to reflect slower growth, higher inflation, and lower unemployment in 2011. The NYT’s Floyd Norris live-blogged the Bernanke presser, while the WSJ examines the FOMC statement.