The Fed Talks About Ending QE
Here they go again! Outgoing Federal Reserve Chairman Ben Bernanke, Incoming Fed Chair Janet Yellen, and a few regional Fed Presidents have been making the rounds explaining their recent decision to taper quantitative easing (QE) – the Fed’s $85 billion a month bond buying program.
The theme from the Fed, whether hawk or dove, was the tapering of QE would continue.
Here is what a few of the Federal Reserve Presidents are saying:
Richmond Federal Reserve President, Jeffrey Lacker (hawk)
Sees substantial improvement in the job market; expects further reductions in the pace of purchases to be under consideration at upcoming meetings
Mr. Lacker has been one of the more hawkish Fed members, consistently voting against stimulus measures and warning about inflation. In Mr. Lacker’s comments last week at the Maryland Bankers Association he noted that he didn’t expect more than 2% GDP growth in 2014, or hiring to surge. Not withstanding his prediction for tepid growth, Mr. Lacker favors and expects the Fed to continue to consider tapering its bond buying throughout the year.
Philadelphia Federal Reserve President, Charles Plosser (hawk)
The Fed faces enormous challenges, inflation a concern; pace of tapering should be faster
Another fiscal hawk, Mr. Plosser, who was against the Fed’s most recent iterations of QE, repeated his warnings regarding inflation at the Korea-America Economic Association in Philadelphia last week. Mr.Plosser said that the Fed may have to be aggressive in raising interest rates if banks start to release their reserves creating inflationary pressures. Plosser also indicated that he favored a faster pace of winding down QE “There’s no reason we shouldn’t consider speeding the process up,” he said. “I have no problem with sort of gradually unwinding it, but my preference would be to move a little quicker and end it sooner rather than later.”
Mr. Plosser becomes a voting member of the Fed board this year.
Boston Federal Reserve President, Eric Rosengren (dove)
Tapering should be gradual, not dramatic
Mr. Rosengren, the sole dissenter against last month’s decision to taper QE, spoke earlier this week in Hartford and warned in a post speech interview with Reuters that the Fed should be careful not to take “dramatic steps” in the tapering process. Seemingly resigned to the current taper course the Fed is on, Mr. Rosengren remarked “I’m comfortable with the current approach that it looks like we’re going to be following through on.”
Mr. Rosengren who will not be a voting member of the Fed’s Board of Governors in 2014 also warned at a meeting of the American Economic Association in Philadelphia last week “The failure of monetary and fiscal policy to generate a more rapid recovery risks creating a long-term structural unemployment problem out of a severe cyclical downturn. This concern also underlies my dissent.”
San Francisco Federal Reserve President, John Williams (dove)
Remove QE at a steady measured pace; keep rates low
John Williams, speaking at the Arizona Arizona Bankers Association this week noted that the Fed was likely to continue tapering its bond buying program at a steady, measured pace throughout the year. Mr. Williams also remarked, “I want to stress that scaling back on asset purchases is not a retreat from accommodative monetary policy,” Williams said. “We’re starting to ease off the gas, but we’re nowhere near hitting the brakes yet.”
Kansas City Federal Reserve President, Esther George (hawk)
Concerned about the consequences of QE
Ms. George, a long term opponent of QE, spoke at the Wisconsin Bankers Association yesterday and expressed her ongoing concern about the inflationary impact of QE and also noted, “An extended period of zero interest rates is not conducive to good banking and encourages a reach for yield”. Despite her opposition to QE, Ms. George appears to be in favor of continued accommodative Fed policy noting “monetary policy is likely to remain highly accommodative for some time with additional asset purchases under the current program and an extended period of low interest rates.”
Ms. George will not have a vote on the Fed board this year.
Minneapolis Federal Reserve President, Narayana Kocherlakota (dove)
The Fed should adopt a more accommodative stance
Mr. Kocherlakota spoke yesterday at a town hall meeting in Minneapolis and argued that the Fed should take an even more accommodative stance to help the economy. He did not comment specifically on QE or the recent action to taper purchases under the program.
We have not heard recently from Dallas Federal Reserve President Richard Fisher, an outspoken hawk who commented last summer that the Fed should stop worrying that the “market is going to be unhappy that we are not giving them more monetary cocaine“. Mr. Fisher becomes a voting member of the Fed this year.
There were no public statements in the past two weeks from dovish Chicago Fed President Charles Evans and centrist James Bullard, neither of whom will have a vote on the Fed board this year.
Outgoing Chairman of the Federal Reserve, Ben Bernanke
Tapering is not tightening
Outgoing Federal Reserve Chairman Ben Bernanke said the recovery is incomplete last week at the American Economic Association’s annual meeting in Philadelphia and noted “The combination of financial healing, greater balance in the housing market, less fiscal restraint, and, of course, continued monetary policy accommodation bodes well for U.S. economic growth in coming quarters”.
Bernanke also echoed the “tapering is not tightening” meme remarking that the decision to taper QE “did not indicate any diminution of the Fed’s commitment to maintain a highly accommodative monetary policy for as long as needed”.
Mr. Bernanke also too a parting swipe at Congress, “With fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be.”
Incoming Chair of the Federal Reserve, Janet Yellen
Janet Yellen spoke earlier this week to Time Magazine. She expects further economic growth. “The recovery has been frustratingly slow, but were making progress in getting people back to work, and I anticipate that inflation will move back toward our longer-run goal of 2 percent.” said Ms. Yellen. She also expects the housing market to “pick back up and I do expect a further recovery.”
Regarding QE, Ms. Yellen argued for its trickle down impact “You know, a lot of people say, this is just helping rich people. But it’s not true. Our policy is aimed at holding down long-term interest rates, which supports the recovery by encouraging spending. And part of it comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.”
Fed Minutes From the December Meeting
The minutes to the Fed’s December taper meeting were released this week. The minutes contained concern that QE may be creating asset bubbles and may be starting to lose its effectiveness.
The minutes also further noted “that ongoing asset purchases could increase the difficulty of managing exit from the current highly accommodative policy stance when the time came. Many participants, however, expressed confidence in the tools at the Federal Reserve’s disposal for managing its balance sheet and for normalizing the stance of policy at the appropriate time.”
What’s Next for the Fed?
It appears the Fed desperately wants to end the QE program. Even with the upcoming taper later this month, the Fed’s balance sheet is still increasing. The Fed knows that it not only has to stop buying mortgage backed securities and U.S. Treasury bonds, but at some point has to sell them. The more they buy the harder this feat is to achieve without disrupting the markets.
The Fed also wants low rates, higher inflation and lower unemployment. In order to try to keep rates low the Fed has committed to setting them low. Can the Fed, however, maintain low interest rates without QE? The Fed is saying that taper is not tightening- but what if it is?
QE has brought about a roaring stock market and a housing “recovery” in the form of higher prices. QE has also allowed the U.S> government to keep the costs of its deficit spending low by keeping interest rates on US. Treasuries low.
What happens if the Fed does indeed continue with the tapering of QE as outlined above? What happens to interest rates? The stock market? real estate? Who buys the U.S. Treasury bonds that the Fed does not buy? at what price? What does the do with their $4 trillion plus of U.S Treasuries and Mortgage backed securities? What if “growth” slows and the economy does not improve?
So far the Keynesians have enjoyed patting themselves on the back for what they have characterized as a recovery claiming “Krugman won”.
The claims that accommodative monetary policy has succeeded and that the worst is over and better economic days are ahead may turn out to be a premature “mission accomplished” style declaration.