Following the ‘Crises of 2008’ the Fed launches Quantitative easing and purchases long term securities increasing the money supply and lowering rates. This activity would result in more investment and encourage lending. Keep in mind the lever the Fed historically wielded was changing the short-term interest rate, so by lowering the discount rate that banks pay on short term loans from the Fed, the Fed is able to provide liquidity and – ease. Monetary Policy's version of stimulus.
Quantitative Easing was much more potent and was a lever that enabled much more control for the Fed, and control over a longer time frame.
Keep in mind the mandate of the Fed:
- Maximum Employment
- Stable Prices
- Moderate Long-Term Interest Rates
One can see that the Fed's tool kit was easily justified by the Board of Governors as they sought to fulfill Congress’ mandate. Not to mention the stability here is global, at least the Fed is responsible for keeping everything stable. This status for America globally is a great privilege. Many Americans are not cognizant of what this affords to us as individuals in this nation.
QE did result in in , but the environment has not been unruly with any problematic inflation, and we certainly did not get any Hyper-Inflation like so many economist were shouting about, especially those grounded in traditional economic ideology.
This new environment has me wondering again how this will all play out of course as the parts at play are each so multifaceted. With that said, I would think we see rise especially with the macro environment of easing and potential fiscal policy and the Federal Funds rate being this low. With that said, the biggest concern I have with this thought process is curiosity of what was stated by Jerome Powell in the last FOMC meeting – rates will be at these levels near the zero-bound (limit of 0% for short-term rates) with the Fed setting a higher target for . Keep in mind the Fed has never been able to hit their recent targets for for years, yet now they want the target even higher. With that thinking in mind, he seemed to indicate the reason the Federal Funds rate can be so low for so long is because will not even be getting to their own target, just as it hasn't in recent memory. Again I still have a bias towards a weaker dollar and – I am however readily willing to change my mind on a moments notice here as we see what actually transpires. I have an alternative to all the "deflation" vs "inflation" debates - an environment that will be stable with just modest .
Please be sure to comment, debate and let me know where you think the dollar goes next.
Or... money supply * velocity = nominal GDP
Supply isn't the issue, this is a demand issue, more specifically demand for wholesale money isn't there because corporations governments and consumers are largely tapped out. What we've learned since start of QE is that what we've been taught about supply side economics and broad money supply is in a word, wrong. The fed cannot create demand, the fed omnipotence is nothing more then a master of smoke and mirrors hiding behind exotic sounding terminology like average inflation targeting. It's clear to anyone that looks past the talking heads sitting in the fed chair and simply looks at the hard data you would now know that the gigantic + 1 quadrillion eurodollar derivatives system outside of the US is what wags the dollar tail and not the fed's measly 7t balance sheet. An increase to a Fed 100t balance sheet would still only be fraction of the derivative market which is the key to everything denominated in US dollar terms.
Until such a time until we get full blown debt forgiveness and a digital digital dollar which will bypass the primary dealer banks and put the money directly into people's bank accounts that will be inflationary and yes it's coming sooner rather than later. But inflation will not materialize under current conditions ,the dollar will continue to strengthen (trade weighted) bonds will continue to rise (yields lower) and gold will continue to inversely track real yields higher until.
What the IMF calls the great monetary reset or Bretton Woods 2.0 will change the equation but only time will tell what that will look like in practice.
I agree we did not get problematically high inflation from Quantitative Easing. And I really enjoy your perspective that the FED cannot mandate “demand”. To be clear, me addressing what I was taught in undergrad was seeking to address the essence of these moving parts more ideally… and for Christ sake – it was undergrad.
Quantitative easing worked in fulfilling all of the Fed’s mandates, however, as was pointed out in another comment the consequences were indeed asset bubbles.
To be clear – we certainly have had inflation this can be seen in the chart just above – it is the red line. I’m just implying it was mild inflation. If you feel I am ignoring 13 years of hard data, please kindly advise what would aid me in understanding this matter better.
To be clear, people purchase inflation protected Treasuries constantly. This is a very popular product. And they acquire these from the treasury bond market and they are called Treasury Inflation-Protected Securities (TIPS). Why do “people buy treasures” wealth preservation, anticipations of moderate growth and because it is largely the Fed themselves doing this asset buying. The Fed themselves are buying Treasury Securities just so we are on the same page. The Fed is buying the Treasury Securities themselves which increases the price of Treasuries. When the price rises, the yield contracts. My point is there is a willful design in getting Treasuries yielding nine basis points. It’s not being driven down by retail demand as I feel your hinting at.
I'm not just suggesting that retail sets the price, that is in fact the case and the proofing in the pudding. It is a falsehood to suggest that large scale asset purchases can create stability in the first instance as it has become evident now to anyone paying attention that the Fed is a bystander to the pricing mechanism for both bonds and subsequently the dollar itself. As mentioned in my original post the euro dollar ie. libor usd denominated assets held outside of the U.S are so large that the Feds total 7T usd domestic balance sheet now only equates to mere 0.5% of all outstanding assets held abroad. The idea that somehow domestic purchases in the billions can have any material impact on underpinning the price is akin to throwing a bucket of water in the ocean in NY and expecting to see a subsequent wave in London. The trade weighted USD (not DXY which is primarily a euro cross) is at the same level it was in February, so in essence the 50% balance sheet expansion since March has devalued the U.S. dollar precisely 0%. It was the widely held belief that this is how QE will work before and yours truly subscribed to it, but no longer. Further to that point my question in relation to TIPS was a rhetorical one i.e if there were any realistic expectation for (any) inflation the price of the TIPS would have already began fall, that is the time preference for money. It hasn't happened, in fact the opposite is true disinflation is priced in, while the oil futures curve is still in contango, another real time indicator that the bazooka is in fact a water pistol.
If you require any further evidence that the Fed does not do monetary policy but in fact is only the manager of expectations please review the Feds recent purchases of corporate bonds through it's SPV's. The numbers purchased were so small that some were in the millions ie. a rounding error in a world where trillions are the norm. Yet the broader market front ran the announcement by purchasing 100's of billions in corporate assets, while the fed did almost no buying yet it achieved intended result. The purchases timing and quantities and other related info is on the NY fed website if you wish to confirm the numbers.
To summarize the Fed and QE have no economic impulse on anything other than the stock market. Not even a tinny tiny wee bit.