Robin Harding

Goldman Sachs is still the Fed’s favourite counterparty for buying and selling Treasuries – or at least it was in the first quarter of 2011. The data comes out two years in arrears and we are now at the period when $600bn of QE2 purchases were in progress.

Goldman got twice as much of that business as anybody else, which is mildly embarrassing for the New York Fed, but reflects the pecking order in the Treasury market. If you know what happened to Citi’s business during that period then please explain in comments. Read more

Chris Giles

Martin Weale’s speech today shows how far the policy debate has shifted at the Bank of England. As recently as early July, this external member of the monetary policy committee was voting for higher interest rates. Now he is openly talking about restarting quantitative easing.

Mr Weale should certainly be praised for being as good as his words. In March he said he was perfectly happy to change his mind if the facts changed and he has done so. No longer voting for a rate rise does not indicate a previous error of judgment, only that circumstances have changed.

From his speech today, Mr Weale, one of the more hawkish MPC members, now clearly thinks that UK QE2 might be necessary and he believes it would work. Read more

Robin Harding

Charts often circulate that show the size of the Fed’s balance sheet alongside movements in commodity or stock prices – they are used to make a prima facie case that QE2 inflated commodity prices.

Here is a not-very-good version but the best I could manage with FRED (note to St Louis – it’d be lovely to have the GSCI index plus all the numbers from H.4.1). Another one you often see is commodity price movements on the days when the Fed actually conducted QE2 buying. Read more

Robin Harding

The New York Fed has announced its schedule for the final purchases under the $600bn programme that began last November. After that, the only purchases will be reinvestments of maturing MBS, which are now down to $12bn a month.

UPDATE Read more

Many investors fear that the Fed’s impending exit from QE2 will have a very damaging effect on the financial markets. Whether they are right will depend on the nature of the exit, and its impact on bond yields. An end to the Fed’s programme of bond purchases, without any increase in short rates, is unlikely to be sufficient, on its own, to trigger a major bear market in bonds and equities. But an end to the Fed’s “extended period” language on interest rates would be a much greater threat. I still do not expect this to happen soon.

Recently, the Fed has purchased 60-70 per cent of all the bonds which have been issued to finance the US budget deficit. Some influential analysts (Bill Gross of Pimco among them) argue that bond yields will rise sharply when the Fed withdraws its life support from the bond market. But there are some powerful advocates, including the Fed chairman himself, for an entirely contrary point of view. Ben Bernanke told Congress in February that he did  not expect to see “a big impact” on bond yields when the Fed ended its asset purchases.

The Fed has hardened its thinking on this question in the past couple of years. It has  decided that QE reduces bond yields via its effect on the total stock of outstanding bonds, and not via its impact on the flow of bonds purchased in any given period. If this is the case, then

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Robin Harding

I’ve written here before that one possibility under discussion at the Fed is tapering off its $600bn QE2 asset purchases in order to minimise market disruption when they end.

Today, president James Bullard of the St Louis Fed raised the option of tapering so total purchases when the programme stops at the end of June are less than $600bn.

“The natural debate now is whether to complete the program or to taper off to a somewhat lower level of assets”

Mr Bullard told reporters after an interesting speech that he would favour a small reduction in the programme at the next meeting in March to reflect the better economic outlook.

Several market commentators have also put forward a slightly different version of a taper: Read more

James Bullard delivered an interesting, chart-rich speech on inflation, QE2 and global output gaps on Thursday. The now non-voting St Louis Fed President was a strong advocate of QE2 as a way to reverse alleged deflationary pressures. Bullard hits back at those claiming the Fed is importing inflation, saying — as Ben Bernanke did in Paris on Friday — that some “countries are choosing to import US monetary policy to some extent”.

But — and now we get to the really interesting bit of the presentation — Bullard does wonder whether the US should consider ‘the global output gap’. As John Kemp pointed out in his column on Thursday morning:

It is the first time a senior official at the U.S. central bank has acknowledged global capacity issues rather than a narrow focus on U.S. unemployment and capacity utilisation might give a better indication of where inflation is headed.

Bullard uses the following chart to suggest that “the global ouput gap is probably much narrower or even positive”:

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Robin Harding

In its statement today the FOMC removed language about buying assets at a pace of $75bn per month, causing a bit of a stir in the markets.

December 15th:

In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.

January 26th:

In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.

There are a few ways that you can read that: Read more

Robin Harding

I agree with my colleagues at FT Alphaville that “counterfactuals are inherently tricky” but I don’t think they quite get to the heart of the case that you could mount against the new estimates of the effects of Fed stimulus programmes that Janet Yellen cited in her speech on Saturday.

Those estimates are that inflation is one percentage point higher than it would be had the Fed made no asset purchases and employment will be 3m higher than it would have been in 2012.

It’s important to note that David Reifschneider, senior associate director of the FRB’s department of research and statistics, and John Williams, once of that parish and now research director of the San Francisco Fed, are co-authors of the paper. That means this is as close to an official ‘Fed view’ as we are ever likely to get on the effectiveness of QE. Read more

Robin Harding

The NY Fed has announced its tentative schedule for bond purchases through to mid-January. The Desk plans to buy $105bn in Treasury securities. Two observations:

(1) It’s a little less than expected. The $75bn related to QE2 is unchanged, but the schedule includes only $30bn for reinvestment of mortgage prepayments, less than the $35bn a month predicted as of the beginning of November. That suggests the rise in 10-year rates is already affecting the NY Fed’s forecast of mortgage prepayments. I’m trying to find out a bit more about this but with an FOMC meeting next week I doubt the FRBNY will be especially forthcoming. Read more

$1,000bn: that’s the estimated fiscal stimulus if current US tax deal discussions come to fruition. Economists have upped their 2011 growth forecasts by 50-70bp on the news; traders have brought forward their estimates of a fed funds raise as yields rose significantly. The policy couldn’t be more different from yesterday’s austerity measures in Ireland.

US citizens at both ends of the pay spectrum would be better off under the deal, paying less tax and therefore having more to spend. Under the current deal – which has some way to go before it is passed – the 2 per cent employee payroll tax cut would be kept, saving some families about $2,000 and costing about $200bn. The main, $800bn part of the deal would extend Bush-era tax cuts across all income groups – including the very wealthy, who are more likely to save the additional income.

Robin writes: Read more

We’ve said a few times that there are right ways and wrong ways to criticise QE2. One of the wrong ways, it seems to us, is to say that the policy hasn’t had its intended affect on markets.

The goal of quantitative easing at the zero lower bound isn’t to lower nominal treasury yields (though that’s not a surprising immediate effect) but to lower expected real yields by raising inflation expectations.

As St Louis Fed president James Bullard explained last Thursday, so far so good. Since Bernanke gave his Jackson Hole speech telegraphing further QE, real interest rates are lower, inflation expectations and US equities are higher, and the dollar has broadly depreciated against other currencies.

Or if you want to look at it another way, at the very least the expected probability of deflation is lower than it was earlier this year — as you can see in this new chart from MacroblogRead more

Robin Harding

There is a definite trend in communications by Fed chairman Ben Bernanke: more and more people are being allowed to ask him questions.

- On November 5th, he answered questions from economics students at Jacksonville University
- On November 30th, he answered questions from business leaders in Columbus, Ohio
- Now on Sunday Dec 5th, he will be interviewed on CBS’s 60 Minutes, answering questions on unemployment, deficits and QE. Read more

Robin Harding

Fed chairman Ben Bernanke is taking his QE2 outreach on the road to Columbus, Ohio, tomorrow for a ‘conversation on the economy’ with business leaders. It’s supposed to focus on the job market but I imagine it will turn to monetary policy. Businesspeople scheduled to attend include:

Alan Mulally, President and CEO, Ford Motor Company, Dearborn, MI
Samuel Palmisano, Chairman of the Board and CEO, IBM Corporation, Armonk, NY
Curtis Moody, President and CEO, Moody•Nolan, Inc., Columbus, OH
Jeni Britton Bauer, President, Jeni’s Splendid Ice Creams, Columbus, OH
Dwight Smith, CEO, Sophisticated Systems, Columbus, OH Read more

Robin Harding

People are missing the really important part of the Fed minutes: the videoconference meeting on October 15th. It tells us some vital things:

- The Fed gave serious consideration to targeting a term interest rate (presumably something such as the ten-year). It chose not to do so, but if it got this much attention, it must be a serious option if inflation continues to drift down or QE2 fails to anchor market interest rates.

- The Fed is considering big changes to its communication practices, including on-the-record press briefings by the chairman, after the fashion of the European Central Bank or the Bank of Japan. Vice-chair Janet Yellen has been put in charge of a subcommittee to investigate communications policy. Read more

Today’s publication of the latest FOMC minutes will probably unveil significant downward revisions to the Committee’s inflation and gross domestic product forecasts for 2011, as well as a large upward revision to its unemployment forecast. More interestingly, the minutes will show whether the FOMC is broadly united on the strategy of quantitative easing which it has now adopted. Is the FOMC clear about how QE is intended to work? I raise the question because Mr Bernanke’s most recent speech made the rather startling claim that the policy should not even be called “quantitative easing” in the first place. Not all of his colleagues on the FOMC, and few of his outside critics, appear to agree with him.

The term “quantitative easing” first came into prominence about a decade ago, when the Bank of Japan was being urged by economic commentators to take direct measures to increase the money supply, after its zero interest rate policy had failed to reverse deflationary forces in the economy. In an article co-authored by Mr Bernanke in 2004, the Bank of Japan was defined as conducting a policy of QE when it “added liquidity to the system beyond what is needed to achieve a (short term interest) rate of zero”. The Bernanke paper suggested that this was normally done “through open market purchases of bonds or other securities which have the effect of increasing the supply of bank reserves”. These are the standard definitions, which have been widely used by economists ever since.

Compare this with what Mr Bernanke said last week: Read more

Robin Harding

A round of fairly interesting Fed speeches today:

Narayana Kocherlakota, Minneapolis

In recent months Mr Kocherlakota argued a number of points that made people think he was opposed to QE2: that there may be significant structural employment, that there are dangers to keeping short-term rates very low for a long time, and that the benefits of additional QE may be limited. But I always thought it was a mistake for people to confuse skepticism and debate with outright opposition. Today he saysRead more

Ralph Atkins

Jean-Claude Trichet, ECB president, sometimes refers to the “brotherhood of central bankers”. He rarely criticises, even indirectly, his colleagues elsewhere in the world. At an ECB conference in Frankfurt that has opened this afternoon, Mr Trichet noted recent comments by Ben Bernanke, the US Federal Reserve chairman, describing an inflation rate of “about 2 per cent or a bit below” as consistent with the Fed’s mandate. The developed world’s two largest central banks “could hardly be more closely aligned” on inflation aims, he exclaimed.

But he drew a clear distinction when it came to the use of “non-standard measures” by the world’s central bankers. One view was they could be used like “engaging the four-wheel drive” once the end of the road had been reached. That was a clear reference to “quantitative easing” by the Fed.

In contrast, the ECB used non-standard measures to “remove the major roadblocks in front of us”. Read more

Robin Harding

The latest Cleveland Fed estimates of inflation expectations are out:

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Robin Harding

Some relief at last for the Federal Reserve: Tom Donohue, president of the US Chamber of Commerce, has spoken out in support of Fed independence and QE2.

Via The Hill:

“We must maintain the independence of the Fed and be very careful not to louse that up on Capitol Hill,” Donohue told reporters in a press briefing after a speech at the Chamber.

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