Tuesday, December 14, 2010

Hoity-Toity Fed People

It has been frustrating to watch Fed officials explain QE2.  The standard Fed story centers around the QE2 driving down long-term interest rates and stimulating more borrowing.  As I have repeatedly noted, this narrow focus on the interest rate channel leaves out many other channels through which monetary stimulus can work.  Moreover, it creates the wrong impression that QE2 will only be successful if long-term interest rates are held low.  Thus the rising long-term yields are seen by many observers as indicating QE2 is a failure when the opposite is probably true.  An anonymous commentator from my previous post eloquently summarizes this  confusion coming from the Fed's marketing of QE2:
I agree that rising yields actually indicate that QE2 is working.

But I also have sympathy for all the people who get "confused," because, of course, you have had hoity-toity Fed people themselves saying that one mechanism through which QE will stimulate things is by lowering long-term rates, supporting housing prices, and so on and so forth.

Bottomline, it would sure help if the Fed would clearly and succinctly communicate (a) the mechanisms by which its policies are supposed to work and (b) the sign-posts and markers (e.g., asset price movements) for people to look at to ascertain whether things are going as intended.

Right now we have the utter IRONY of QE2 working exactly as it was intended (thank the lord) and the "experts/pundits" getting downright angry because what they're seeing is not what they expected to see, and, of course, what they expected to see is simply no more and no less than what they were told to expect by the very people who are implementing QE2.
Well said.

3 comments:

  1. From the FRONT PAGE of today's Washington Post:

    Headline: "Uptick in interest rates puts Fed on alert."

    Article: "The climb in interest rates is confounding the Fed's efforts as it tries to bring down rates by buying $600 billion in Treasury bonds. The central bank affirmed that it would stay on course with those plans Tuesday after a policy meeting."

    Image of today's paper-copy WaPo:
    http://www.washingtonpost.com/wp-srv/print/asectionfrontimage.html

    Web version of article:
    http://www.washingtonpost.com/wp-dyn/content/article/2010/12/14/AR2010121403608.html

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  2. Are we going to have QEasings forever? What happens when political rhetoric forces the end to QEs, will the economy downturn?

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  3. good grief. its simple. the smart investors (those whose wealth is not tied up in money, as the average american's is (or homes)) know now inflation must come from the money creation. thus the move in rates. short term, yes there will be a party, but ultimately the money creaton (by deficit or by purchase of private assets at par by the fed) will lead to robbery of money wealth from money holders.

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