Tag Archives: Quantitative Easing

QE2’s Effectiveness

This post is an update to that of December 9, 2010, “Measuring QE2 Effectiveness.”

There are many different ways one could use to gauge whether QE2 is successful.  Of great significance, I am not aware of any official statement that specifically states the goals (and metrics of such) of QE2.

However, lowering of interest rates, especially that of the 10-Year Treasury, appears to be a/the primary goal.

Below is a chart of the 10-Year Treasury yield, starting on November 3, 2010, the date of the announcement.  The actual asset purchases began on November 12:

(click on chart to enlarge image)(chart courtesy of StockCharts.com)

As one can see, the 10-Year Treasury yield has risen substantially over this period, rising from 2.594% on the close of November 2, 2010 to 3.725% as of yesterday’s (February 8, 2011) close.

As for the goal of (modestly) increasing inflation, there are no daily CPI values available for this period.  However, if one uses values from the Billion Prices Project (which I discussed in the November 24 post) as a proxy, the index values have increased.  The index was 100.76 on November 3;  100.6679 on November 12;  and 102.0273 on February 7.

I plan on further commenting upon QE2 and its apparent effectiveness in future posts.  (all past posts on Quantitative Easing can be found here)

A Special Note concerning our economic situation is found here

SPX at 1324.57 as this post is written

Ben Bernanke’s Speech And Q&A On February 3, 2011

I could comment extensively on Ben Bernanke’s speech and Q&A at the National Press Club yesterday, as I partially and fully disagree on many of the comments he made.  I find it unfortunate that official transcripts of this and previous Q&A sessions are not available.  (speech video and transcript;  Q&A video and partial transcript)

One aspect that I would like to briefly comment upon is that of the success of QE2.   Quantitative Easing’s primary goal is to lower interest rates.  However, during QE1 and (to date) QE2, interest rates have risen, not declined, since the program was begun.  This is highly important and notable, yet doesn’t receive proper recognition.  It begs the question as to whether QE1 and QE2 are failed interventions.

Proponents of QE2 claim that it is “working” or is “effective” as the stock market is rising, GDP is rising, or use a variety of other arguments to justify the program.  However, that does nothing to change the fact that interest rates have risen, not declined, under QE2 (and QE1).

This passage from yesterday’s speech is notable with regard to the above:

“Yields on 5- to 10-year Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases. All of these developments are what one would expect to see when monetary policy becomes more accommodative, whether through conventional or less conventional means. Interestingly, these developments are also remarkably similar to those that occurred during the earlier episode of policy easing, notably in the months following our March 2009 announcement of a significant expansion in securities purchases. The fact that financial markets responded in very similar ways to each of these policy actions lends credence to the view that these actions had the expected effects on markets and are thereby providing significant support to job creation and the economy.”

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A Special Note concerning our economic situation is found here

SPX at 1307.10 as this post is written

Quantitative Easing Exit Issues

During QE1 (the first round of The Federal Reserve’s Quantitative Easing) there seemed to be substantial commentary and discussion concerning the exit of such a program.

Over the last few months the discussions over the exit strategy seem to have diminished greatly – despite the start of QE2 and speculation of additional QE programs, i.e. QE3, QE4, etc.

I have discussed the various risks of Quantitative Easing in several posts.  As I stated in the August 13 post, “There are an array of risks embedded in such QE efforts.”  These risks, although very substantial, seem to (severely) lack recognition.

The (eventual) exit of Quantitative Easing is one of these risks.  This is a very complex topic of which much can be written.

While I believe it to be rather incontrovertible that The Federal Reserve does have the knowledge and tools to exit such QE programs, that is not to say that doing such will be without complications, adverse unforeseen consequences, or market disruptions.

While it is possible that the eventual exit from QE will go smoothly, I think that the possibility of adversity in doing so is high.  There is much that can go wrong in “a big way” on numerous fronts – especially if an exit is done under exigent circumstances.  As well, there are many conflicting incentives inherent in Quantitative Easing, which further complicates the “exit” issue.

One item that is particularly disconcerting is the potential for capital losses on the Fed’s growing balance sheet.  I’ve already commented about this in the November 5 post.  In a December 2 Cumberland Advisors commentary titled “Fed Exit Strategies – Technical Analysis” (pdf), there are some notable statistics on this subject in their commentary on the exit issue.

It should be very interesting to monitor this QE exit as it occurs…

A Special Note concerning our economic situation is found here

SPX at 1236.63 as this post is written

Measuring QE2 Effectiveness

In announcing QE2 in their November 3 FOMC meeting, the statement contained the following excerpt:

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.”

There are many different ways one could use to gauge whether QE2 is successful.  Of great significance, I am not aware of any official statement that specifically states the goals (and metrics of such) of QE2.

However, lowering of interest rates, especially the 10-Year Treasury, appears to be a/the primary goal.

Below is a chart of the 10-Year Treasury yield, starting on November 3, the date of the announcement.  The actual asset purchases began on November 12:

(click on chart to enlarge image)(chart courtesy of StockCharts.com)

As one can see, the 10-Year Treasury Yield has risen substantially over this period.

As for the goal of (modestly) increasing inflation, there are no daily CPI values available for this period.  However, if one uses values from the Billion Prices Project (which I discussed in the November 24 post) as a proxy, the index values have actually decreased.  The index was 100.76 on November 3; 100.6679 on November 12; and 100.51 on December 7.

It will be very interesting to see whether QE2 seems to meet its objectives.  Of course, if QE2 fails to reach its objectives, perhaps the foremost question would appear to be why this is so.  I plan on further commenting upon QE2 and its apparent effectiveness in future posts.  (posts on Quantitative Easing can be found here)

A Special Note concerning our economic situation is found here

SPX at 1232.55 as this post is written

Ben Bernanke’s December 5 2010 “60 Minutes” Interview – Comments

Ben Bernanke gave his second interview to “60 Minutes” last night.

This interview is very notable in many respects.  I could make extensive comments on various aspects of the interview, as I continue to have vast differences of opinion with many of Ben Bernanke’s stated comments and analyses.   For now I will make some brief comments on various excerpts from the transcript.  (My previous blog posts on Ben Bernanke can be found under the “Ben Bernanke” category.)

Perhaps the first thing to catch my attention was the following introductory comment by Scott Pelley:  “Bernanke feels he has to speak out because he believes his critics may not understand how much trouble the economy is in.”

Other notable exchanges between Pelley and Bernanke include (with my comments, if any, prefaced in italics):

Pelley: Some people think the $600 billion is a terrible idea.

Bernanke: Well, I know some people think that but what they are doing is they’re looking at some of the risks and uncertainties with doing this policy action but what I think they’re not doing is looking at the risk of not acting.

my comment: This “risk of not acting” is a familiar refrain from those who support intervention efforts…

Bernanke (with regard to QE2):  “What we’re doing is lowing interest rates by buying Treasury securities. And by lowering interest rates, we hope to stimulate the economy to grow faster.

my comment: I think what Ben Bernanke meant to say is that he hopes to lower rates by buying Treasury securities.

Pelley: Can you act quickly enough to prevent inflation from getting out of control?

Bernanke: We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now.

Pelley: You have what degree of confidence in your ability to control this?

Bernanke: One hundred percent.

my comment:  One of the most dangerous aspects of QE2 is that we (as a nation) don’t appear to have a proper understanding and respect for the risks inherent in such an intervention.  I think it is very unfortunate that most people seem (solely) fixated on possible inflationary implications.  This fixation seems to preclude discussions of many other risks, which I have mentioned in other posts such as that of November 5.  Also, while Ben Bernanke may be able to “raise interest rates in 15 minutes” that is not to say that doing so would be “painless” or not “highly disruptive” to the markets and economy – especially if raising the interest rate is done under (seemingly) urgent necessity.

Pelley: How would you rate the likelihood of dipping into recession again?

Bernanke: It doesn’t seem likely that we’ll have a double dip recession. And that’s because, among other things, some of the most cyclical parts of the economy, like housing, for example, are already very weak. And they can’t get much weaker. And so another decline is relatively unlikely. Now, that being said, I think a very high unemployment rate for a protracted period of time, which makes consumers, households less confident, more worried about the future, I think that’s the primary source of risk that we might have another slowdown in the economy.

Pelley: You seem to be saying that the recovery that we’re experiencing now is not self-sustaining.

Bernanke: It may not be. It’s very close to the border. It takes about two and a half percent growth just to keep unemployment stable. And that’s about what we’re getting. We’re not very far from the level where the economy is not self-sustaining.

my comments:  First, the idea that housing “can’t get much weaker” is incorrect.  My latest post on the potential downside of the housing market was on October 24.  Second, It is interesting to hear Ben Bernanke make these comments about sustainability of this recovery.  One of the main tenets of this blog is that the (purported) “economic recovery” we are currently experiencing is inherently unsustainable.  I have elaborated upon this topic here.

Pelley: Is there anything that you wish you’d done differently over these last two and a half years or so?

Bernanke: Well, I wish I’d been omniscient and seen the crisis coming, the way you asked me about, I didn’t. But it was a very, very difficult situation. And the Federal Reserve responded very aggressively, very proactively.

my comment:  This is a very candid assessment by Bernanke.  He is correct in his assessment that it was “a very, very difficult situation.”  The question arises as to whether this failure to see the first crisis coming will be extended to that of the next crisis.  I believe that, unfortunately, it will (and has).  Perhaps the foremost characteristic of our current and future economic situation is that of vast complexity.  Also, with regard to the comment that “the Federal Reserve responded very aggressively, very proactively” – this is largely irrefutable; however, the main question should be whether the actions were correct both from a short-term and long-term perspective.  I discuss this concept in a January 18 2009 article about interventions.

A Special Note concerning our economic situation is found here

SPX at 1224.71 as this post is written

Monetary Policy And The U.S. Dollar

As those familiar with this blog know, I am very concerned about the vulnerability of the U.S. Dollar to a substantial decline.  I have written extensively about this situation.

On November 12, Macroeconomic Advisers had a blog post from Larry Meyer that discussed monetary policy (focused on QE2) and the U.S. Dollar.  While I don’t agree with various parts of this blog post, I nonetheless think it is noteworthy to see what a (very) prominent economic consulting firm has to say on the issue.

Here are some excerpts from that November 12 post:

How does the exchange rate affect monetary policy? How will the foreign backlash affect monetary policy going forward?

  • We have not changed our firmly-held view that the FOMC has no dollar policy; it has no target for the dollar, just as it has no target for equity valuations. Dollar policy is the realm of the Treasury. The foreign backlash will not dissuade the Committee from pursuing what it sees as appropriate policy.
  • For the most part, the dollar has two roles with respect to monetary policy: First, it is part of the transmission mechanism, part of how monetary policy affects the economy. Second, to the extent that the dollar moves independently of monetary policy, it is like any other variable: The FOMC takes actual and projected changes in exchange rates into account in its forecast and responds accordingly.
  • There are two circumstances (discussed below) under which the dollar would take more of a center stage in FOMC deliberations: (i) a “free fall” in the dollar and (ii) a tighter and more intense link between the dollar and commodity prices in a context of a faster pass-through from commodity prices to long-term inflation expectations and core inflation.

also:

Does the FOMC ever worry about the dollar? Yes, under two circumstances:

  • A Dollar Collapse: If the dollar were to go into “free fall” (we will know it when we see it), the FOMC would face an enormous challenge because that would be catastrophic for the U.S. and foreign economies alike. There would be chaos in financial markets around the world. This is a nightmare scenario for the Fed, but a tail risk. Here, we expect that the FOMC would have to be part of the policy response to stabilize the dollar. Free fall, however, is much more likely as a result of continued fiscal irresponsibility in the U.S.
  • The Dollar-Commodities-Inflation Nexus: The FOMC likely worries about the recent seemingly more intense relationship between the dollar and commodity prices. The consequences depend on the degree to which commodity prices are passed through to core inflation. In any case, a sharp and persistent rise in commodity prices could raise concern about an unhinging of long-term inflation expectations, which, in turn, could affect monetary policy. Today, however, the main driver of rising commodity prices, we believe, is supply and demand, especially soaring demand by Asian economies.

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A Special Note concerning our economic situation is found here

SPX at 1199.21 as this post is written

Ben Bernanke November 6, 2010 Remarks On QE2

On Saturday (November 6) Ben Bernanke took part in a panel discussion.  This was part of The Federal Reserve conference “A Return to Jekyll Island: The Origins, History, and Future of the Federal Reserve.”

I found these comments, pertaining to QE2, to be highly notable:

Ben Bernanke:

“There is not really, in my mind, as much discontinuity as people think.  This sense out there, that quantitative easing or asset purchases, is some completely far removed, strange kind of thing and we have no idea what the hell is going to happen, and it’s just an unanticipated, unpredictable policy – quite the contrary.  This is just monetary policy.”

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A Special Note concerning our economic situation is found here

SPX at 1213.40 as this post is written

Ben Bernanke On QE2

Ben Bernanke wrote an op-ed in The Washington Post yesterday titled, “What the Fed did and why: supporting the recovery and sustaining price stability.”

I could write very extensively about this piece as it is highly notable on several fronts.  For now, I will limit my comments.

My analysis indicates that the risks of QE lack recognition.  As well, the benefits appear highly overstated.  As such, we (as a nation) appear to have a mistaken understanding of the risk-reward ratio of large-scale QE.  This is especially problematical as I expect additional large-scale QE will be done in the future.  This belief is echoed by other prominent parties.

What I find interesting about Bernanke’s (and other Fed members’) comments about QE is that they seem very limited in discussing risks of QE.  This begs the question as to whether Fed members don’t think there is much risk in QE.  From what I have seen, the main risk Fed members have discussed is money supply issues / future inflation as well as the ability to gracefully (i.e. non-disruptively) exit such QE efforts.  Bernanke briefly mentions both of these items in his above-mentioned Washington Post op-ed.

However, I view those risks as being only two among a multitude of others.  As I wrote in the August 13 post, “There are an array of risks embedded in such QE efforts.”  In that post I discuss QE risks to the U.S. Dollar and QE’s role in fostering asset bubbles.

Another risk that receives little recognition is the risks embedded in the ever-increasing size of the Fed’s portfolio.   This is a very complex potential risk, entailing both large potential capital losses (driven in large part by rising interest rates) as well as other unintended (negative) consequences.  The potential capital losses aspect is well-documented in a Wall Street Journal editorial of today titled “High Rollers at the Fed.”

Both of these risks, as well as the multitude others, will only grow in importance if, as I suspect, additional (over and above Wednesday’s $600B announcement) large QE is performed in the future.

A Special Note concerning our economic situation is found here

SPX at 1222.43 as this post is written

Quantitative Easing – Varied Thoughts

There has been an immense amount of material written about additional Quantitative Easing (QE2).

Here are some of the works that I have found among the most interesting (although I don’t necessarily agree with what is being said):

Guidelines for Global Economic Policymaking,” (pdf) Gregory Hess, Shadow Open Market Committee, October 12, 2010

Investment Outlook, November 2010, Bill Gross

“Night of the Living Fed,” (pdf) Jeremy Grantham, GMO, October 2010

“What’s Ahead for the Fed,” Roubini Global Economics, October 27, 2010

excerpted material, Contrary Investor, October 14, 2010 commentary

As for my own thoughts on the issue, I have written about QE2 directly in the August 13 post, and have written extensively about interventions in various posts.  As well, two articles focus on interventions, “Intervention’s Potential Blindspots” as well as “My Overall Thoughts On The Bailouts, Stimulus Measures, and Interventions.”

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A Special Note concerning our economic situation is found here

SPX at 1193.59 as this post is written

S&P500 Vs. Consumer Confidence

The following commentary and chart is excerpted from the October 14, 2010 ContraryInvestor.com commentary.  I find it interesting in a variety of different ways, and it raises a lot of questions with regard to the stock market, consumer confidence, QE1, and QE2…

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We have not touched on consumer confidence for a good while, but now is the time.  It’s time because of the certainty of QE ahead.  Again, absolutely key question being, will QE2 positively influence the real economy?  QE I was a strike out.  And what of QE2?  We believe a key indicator to watch as to whether QE2 will transmit to the real economy is the present conditions component of the headline consumer confidence index.  Clearly the aim of QE2 is to inflate asset prices even further, let’s not beat around the bush about it.  QE I inflated financial and commodity prices, but left real world prices of leveraged residential real estate and commercial real estate untouched.  Moreover, QE I did not help headline consumer confidence recover.  We’ll spare you the chart, but headline consumer confidence continues to rest at levels historically consistent with recession.  Very quickly, the headline consumer confidence report is driven by two subcomponents that are present conditions and future expectations.  Historically, the present conditions component of the headline number has been highly directionally correlated with the equity market over time.  You can see exactly this in the chart below.  Of course without the Fed overtly telling us this as a driver of their QE2 decision making, they are implicitly hoping higher stock prices (the assumed wealth effect) will engender accelerating consumer confidence, thereby motivating consumers to borrow and spend (or at worst just spend).  This likewise had to be a key rationale of QE I as the Fed is surely aware of this prior cycle linkage between stock prices and confidence in present conditions.

But what stands out like a sore thumb in the chart above is that the present conditions component of the confidence report never recovered at all even as equities experienced one of the greatest 13 month rallies in history under QE I (exactly as we marked in the chart) from March of 2009 through April of this year.  Moreover, and as is also clear, even as heavy Fed POMO was kicked off in August and September that lifted stocks to their greatest September gain in over seven decades, the present conditions component of the consumer confidence survey continued to deteriorate up through the most recent numbers.  Message being?  At least for now consumer confidence is not being bolstered by financial asset price inflation.  A complete anomaly relative to historical experience.  QE2 is clearly a bet this anomaly will fall back in rhythm with historical experience.  So, we need to intently watch the present conditions component of the consumer confidence report ahead for clues as to whether QE2 will positively impact the real economy through bolstering consumer confidence, or otherwise.”

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A Special Note concerning our economic situation is found here

SPX at 1183.26 as this post is written