Why would it have been rational for the Fed to raise rate since 2010? Like you said, we are not in an inflationary environment (though I take some issues as to how much producers are pass on input cost). It's hard to argue that the job picture worsened in 2010 and remains difficult. Wouldn't it be rather irrational for the Fed to raise rate given that those are their dual mandates?
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What effect would a strong oil rally have on the U.S. economy?
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Quote from sjfan:
Why would it have been rational for the Fed to raise rate since 2010? Like you said, we are not in an inflationary environment (though I take some issues as to how much producers are pass on input cost). It's hard to argue that the job picture worsened in 2010 and remains difficult. Wouldn't it be rather irrational for the Fed to raise rate given that those are their dual mandates?
Basically, you are right and the FED has not actually been "wrong" by holding rates. They just aren't particularly right in doing so either.
The only problem is that if things get worse (i.e. oil $110) there basically isn't anything left in the toolshed to prevent a deflationary spiral. They can't aggressively ease with oil at $110 and rates at 0.25%. I'm not saying that they should do what in historical context would be construed as "tightening" but they should have moved from "SUPER EASY FUNNY MONEY YAAAAY!!!" to simply easy policy (around 1%-1.5%) when the greatest danger of the crisis was overcome. I think they got greedy.
The part I dislike is the sticking to the mandate, in spite of clear prior indications that this may become dangerous at a point in the near future (doubling of S&P500 in less than two years is nice but can not be construed as anything but a speculative frenzy based on massive liquidity provision). They must know their hands are tied if something goes "not according to plan". I also dislike Bernanke personally because he is a flip-flopper (just like the government by the way) who sets out to reduce interest rates and when that fails (miserably) claims the goal was to goose the Russell 2000.
Any meaningful slowdown will be impossible to overcome at this point.
That's not particularly fair is it? Neither reducing rates nor pumping up equity is the *end goal* of Fed monetary policy. Price stability and economic growth are. Those are merely channels. Bernanke believes at 0-25bps, the rate channel is no longer relevant and switched to his "portfolio channel", which is to pumping enough wealth via equity (though asset allocation away from bonds) to reignite consumption. In a sense, it's the monetary policy equivalent of skipping the financial intermediaries through which fed fund rates operate and directly inflate the asset side of consumer balance sheets.
Whether or not that will work remains to be seen and rather debatable. However, it doesn't seem very 'flip flop' to me.
Whether or not that will work remains to be seen and rather debatable. However, it doesn't seem very 'flip flop' to me.
Quote from Locutus:
I also dislike Bernanke personally because he is a flip-flopper (just like the government by the way) who sets out to reduce interest rates and when that fails (miserably) claims the goal was to goose the Russell 2000.
Quote from sjfan:
That's not particularly fair is it? Neither reducing rates nor pumping up equity is the *end goal* of Fed monetary policy. Price stability and economic growth are. Those are merely channels. Bernanke believes at 0-25bps, the rate channel is no longer relevant and switched to his "portfolio channel", which is to pumping enough wealth via equity (though asset allocation away from bonds) to reignite consumption. In a sense, it's the monetary policy equivalent of skipping the financial intermediaries through which fed fund rates operate and directly inflate the asset side of consumer balance sheets.
Whether or not that will work remains to be seen and rather debatable. However, it doesn't seem very 'flip flop' to me.
You make an interesting point, but it is particularly fair. The FED can't directly inflate the equity asset market and to the best of my knowledge it was not their intention to "boost equity prices and create a wealth effect". That was an unforeseen consequence of their actions. Their goal was to stick to their mandate which has nothing to do with the Russell 2000.
Thus the expected outcomes were:
-Continuously relatively low (real) rates (for credit in general)
-Improving job market
-Significant Core CPI improvement, preferably to their long-term target
NONE of which materialized in the slightest. The only thing that DID materialize was one total miss (rates) and two no-progress. Then, to make it all seem like it is not the most miserable failure of a policy in the history of the FED it is deemed to be "a success" because equity prices are higher and are creating a "wealth effect"? Give me a fucking break.
Edit: If the FED has as a goal to inflate equity asset prices to unrealistic valuations (after all there is no point in inflating asset prices because future real returns correlate strongly with valuation metrics) all they had to do was say "We want to inflate equity prices" and the traders would've front-run them, creating the desired "wealth effect" on margin debt (by the way, margin debt is already approaching pre '00 highest points relative to total capital invested and is on the way to becoming bubblicious again, but that is a different point). To an extent that is what happened anyway, especially after Bernanke did actually say it.
Also, IIRC the economic theory to which the Fed subscribes states that high rates hampers economic growth. Considering they want economic growth it is sort of reasonable to assume their goal was not for Joe Sixpack's ARM to shoot through the roof.
Actually, Bernake made a specific point to talk about this in the Jackson Hole speech and the editorial he published in the Washington Post right after QE2 started. Finally, the Fed has harped on this theme in just about every single of the governor's congressional speeches.
They said exactly what they were going to do and the market front ran them exactly like the markets are supposed to do.
You should also read Bernake's (now) famous speech in 2004; He spelled out exactly this QE intermediated 'portfolio channel'. This is speech where he pointed out the extreme was to throw money out of the helicopter. In the intrim are all these options.
So, it's fair to debate whether or not the portfolio channel will work. It's not fair to say it's unintended.
Note: driving equity levels to insane valuations is part of the strategy: a speculative bubble results in a far less painful recession than a credit bubble recession/depression. I believe the Fed is happy to take the downside of a speculative bubble to avoid the pain of the aftermath of a credit bubble.
They said exactly what they were going to do and the market front ran them exactly like the markets are supposed to do.
You should also read Bernake's (now) famous speech in 2004; He spelled out exactly this QE intermediated 'portfolio channel'. This is speech where he pointed out the extreme was to throw money out of the helicopter. In the intrim are all these options.
So, it's fair to debate whether or not the portfolio channel will work. It's not fair to say it's unintended.
Note: driving equity levels to insane valuations is part of the strategy: a speculative bubble results in a far less painful recession than a credit bubble recession/depression. I believe the Fed is happy to take the downside of a speculative bubble to avoid the pain of the aftermath of a credit bubble.
Quote from Locutus:
Y to the best of my knowledge it was not their intention to "boost equity prices and create a wealth effect". That was an unforeseen consequence of their actions. Their goal was to stick to their mandate which has nothing to do with the Russell 2000.
Quote from sjfan:
Actually, Bernake made a specific point to talk about this in the Jackson Hole speech and the editorial he published in the Washington Post right after QE2 started. Finally, the Fed has harped on this theme in just about every single of the governor's congressional speeches.
They said exactly what they were going to do and the market front ran them exactly like the markets are supposed to do.
You should also read Bernake's (now) famous speech in 2004; He spelled out exactly this QE intermediated 'portfolio channel'. This is speech where he pointed out the extreme was to throw money out of the helicopter. In the intrim are all these options.
So, it's fair to debate whether or not the portfolio channel will work. It's not fair to say it's unintended.
Note: driving equity levels to insane valuations is part of the strategy: a speculative bubble results in a far less painful recession than a credit bubble recession/depression. I believe the Fed is happy to take the downside of a speculative bubble to avoid the pain of the aftermath of a credit bubble.
All right. I had not understood that point from the communications that I did see earlier (it's not really my main focus) and I was surprised with Bernanke's 60 minutes comments on equity prices. I also vaguely remember that Bernanke or some other FOMC member had been mentioning the goal of keeping rates low (not just Fed funds). I suppose I should keep better track of what these people say. Assuming you are correct that he did state these things clearly then I suppose it's not flip-flop. I guess I'll take the disliking Bernanke (for that reason) part out of the equation.
For the remaining points, you can't point to this as an example of working-as-intended policy, however, considering there is not much progress being made in any area except equities (and other speculative asset classes like commodities). The idea to inflate speculative assets to unsustainable levels to avoid pain is like you say debatable.
Regarding credit bubble: was excessive credit really solved? So far as I saw, the only difference between now and then is that a good portion of the debt was transferred from the corporate balance sheet to the public one. Either way an overleveraged government is as little sustainable as is an overleveraged corporate sector. It has been my understanding that deflation can be delayed but is eventually impossible to prevent, however much QE you throw at it.
In Bernanke's defence though, he never said he could throw money out of helicopters, he was referring to a quote made by Milton Friedman.
Edit(yes I like adding my posts): I just more or less accidentally found this article from January 2009: http://brontecapital.blogspot.com/2009/01/why-federal-reserve-should-literally.html
"You need to convince people not to hold money. You need to convince them that cash is trash.
And to do that you need to convince the public that there will be inflation (the above gross leverage argument notwithstanding).
To do that the Federal Reserve has to be credibly irresponsible. It is not enough to print a couple of trillion dollars (which they have) because everyone thinks (with some justification) that they will suck back the money supply when the crisis is over.
No â you have to be more visibly reckless than that. You have to really convince people that there will be inflation."
I guess Fed policy has actually been relatively succesful, but much moreso with speculators than it has been with consumers. However perhaps they will follow...
Well thanks either way sjfan for the debate, has opened my eyes to a wider array of possibilities.
Let me address your points in parts:
(1) It's not supposed to be all asset classes. It's supposed to be equity - the widely held asset class in retail portfolios and 401ks. Inflating commodities directly doesn't achieve any goals except to add input price shocks. Finally, bonds are supposed to get so rich, assets flow from bonds to equity. That did happen as intended. The part that's unintended, I argue, is the massive flow to emerging market equity.... that might be rather dangerous down the road.
(2) The retail balancesheets were destroyed in the subprime crash. Sr Loan Officer Survey (published by the Fed) shows a massive contraction in both consumer and business demand and supply for credit. Corp balance sheets were largely repaired by the end of QE1. The point of QE2 is to try to repair consumer balancesheets; So far, there's no indication that it has failed. Whether it will succeed remains to be seen.
(3) Finally, deflation being sovable by QE is exactly Bernanke's thesis (as both the academic and the Fed governor). There are others who disagrees with him (Koo at Nomura, for example). But in Bernanke's mind, this method is consistent with his goal. History will be the ultimate judgement of his genius or folly.
(4) Your point about a credit bubble in the govt sector is well taken. I have my concerns about that as well. My only point to take here is that it's a consequence of fiscal rather than monetary policy. Fiscal policy remains in the hands of congress, rather than the central bank.
(1) It's not supposed to be all asset classes. It's supposed to be equity - the widely held asset class in retail portfolios and 401ks. Inflating commodities directly doesn't achieve any goals except to add input price shocks. Finally, bonds are supposed to get so rich, assets flow from bonds to equity. That did happen as intended. The part that's unintended, I argue, is the massive flow to emerging market equity.... that might be rather dangerous down the road.
(2) The retail balancesheets were destroyed in the subprime crash. Sr Loan Officer Survey (published by the Fed) shows a massive contraction in both consumer and business demand and supply for credit. Corp balance sheets were largely repaired by the end of QE1. The point of QE2 is to try to repair consumer balancesheets; So far, there's no indication that it has failed. Whether it will succeed remains to be seen.
(3) Finally, deflation being sovable by QE is exactly Bernanke's thesis (as both the academic and the Fed governor). There are others who disagrees with him (Koo at Nomura, for example). But in Bernanke's mind, this method is consistent with his goal. History will be the ultimate judgement of his genius or folly.
(4) Your point about a credit bubble in the govt sector is well taken. I have my concerns about that as well. My only point to take here is that it's a consequence of fiscal rather than monetary policy. Fiscal policy remains in the hands of congress, rather than the central bank.
Quote from Locutus:
For the remaining points, you can't point to this as an example of working-as-intended policy, however, considering there is not much progress being made in any area except equities (and other speculative asset classes like commodities). The idea to inflate speculative assets to unsustainable levels to avoid pain is like you say debatable.
Regarding credit bubble: was excessive credit really solved? So far as I saw, the only difference between now and then is that a good portion of the debt was transferred from the corporate balance sheet to the public one. Either way an overleveraged government is as little sustainable as is an overleveraged corporate sector. It has been my understanding that deflation can be delayed but is eventually impossible to prevent, however much QE you throw at it.
In Bernanke's defence though, he never said he could throw money out of helicopters, he was referring to a quote made by Milton Friedman.
Edit(yes I like adding my posts): I just more or less accidentally found this article from January 2009: http://brontecapital.blogspot.com/2009/01/why-federal-reserve-should-literally.html
"You need to convince people not to hold money. You need to convince them that cash is trash.
And to do that you need to convince the public that there will be inflation (the above gross leverage argument notwithstanding).
To do that the Federal Reserve has to be credibly irresponsible. It is not enough to print a couple of trillion dollars (which they have) because everyone thinks (with some justification) that they will suck back the money supply when the crisis is over.
No â you have to be more visibly reckless than that. You have to really convince people that there will be inflation."
I guess Fed policy has actually been relatively succesful, but much moreso with speculators than it has been with consumers. However perhaps they will follow...
Well thanks either way sjfan for the debate, has opened my eyes to a wider array of possibilities.