Economists in Jackson Hole Say QE Less Potent Than Fed Believes

Arvind Krishnamurthy (Northwestern) and Annette Vissing-Jorgensen (UC Berkeley) wrote a paper which scrutinized the Fed's support of QE.  The authors believe that the Fed's participation in the mortgage market (via purchases of MBS) had a greater impact on the private economy than buying government securities, the traditional method in which the Fed influences rates.

It may be a tell tale sign that most of FOMC members that have taken part in the decision making process for QE will be leaving the Fed over the next year or so.  There has been great debate not only on who will be the next head at the Federal Reserve (Yellen or Summers), but also whether or not Bernanke is leaving by his own accord.  In any event, I don't view a change in leadership at the Fed as a positive development at this point in the cycle.  If Bernanke is being forced out, you wonder if its because of his public critique of the government's inability to develop expansionary policies.  If Bernanke is quitting, one couldn't help but ponder if its because he doesn't want to be front and center in another crisis.  Especially if it's one that he helped create through unorthodox monetary policies.

Despite working through narrower channels, the Fed’s buying of mortgage-backed securities in QE3 has been more effective at boosting the economy through its effect on mortgage rates, according to the paper.

“The Fed’s cessation of MBS purchases or sale of MBS are likely to be more economically important for the private sector than a sale of Treasury bonds, which by itself will affect mainly government borrowing costs,” according to the paper. “There is little evidence for the operation of a broad channel through which large-scale asset purchases lower the yield on all long-term bonds.”

Via Bloomberg

Previewing Jackson Hole

The big news this year at Jackson Hole was known three months ago.  It's not going to be about what is said at the Fed's annual symposium, but rather who will not be attending.  Fed Chairman Bernanke announced a while ago he had a "scheduling conflict" and wouldn't be attending the event.  Besides Bernanke, the head of the ECB and BOE are also not attending this year's meeting.


Fed Jackson Hole, Wyoming, conference. 

The Federal Reserve Bank of Kansas City hosts its annual symposium.

 Panel moderators include former Bank of Israel Governor Stanley Fischer on Aug. 23 and Fed Vice Chairman Janet Yellen on Aug 24. 

Speakers during the three-day event include International Monetary Fund Managing Director Christine Lagarde, Bank of Japan Governor Haruhiko Kuroda, Banco Central do Brasil Governor Alexandre Tombini and Banco de Mexico Governor Agustin Carstens. Federal Reserve Chairman Ben Bernanke, whose term ends in January, is
not attending the conference. Speaker times to be announced on Aug 22. In Jackson Hole, Wyoming. Through Aug 24

Via Bloomberg

Comments on Bernanke's 2012 Jackson Hole Speech

Comments:

• In August 2007, Fed Funds was 5.25%
• By December 2008, we had ZIRP
• FOMC turned to nontraditional policy approaches to support the recovery
• The Fed has been in the process of learning by doing.  In other words, trial and error.
• Bernanke gives justification, citing academic work, of the Fed's focus on enacting monetary policy through the portfolio balance channel.  This basically covers large-scale asset purchases.
• Explicitly says that this type of policy "...can signal that the central bank intends to pursue a persistently more accommodative policy stance..."
• A sturdy conducted by the Fed using the Board's FRB/US model of the economy, as of 2012, the first two rounds of LSAPs (Large-Scale Asset Purchases) "...may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred."
• Is this an indirect shot at the fiscal policy makers?  In other words, the only reason the economy  is hanging on is because of monetary policy.
• Pg 12 - "...appears reasonable to conclude that nontraditional policy tools have been and can continue to be effective in providing financial accommodation..." The potential ground work to allow more non-traditional policies.
• Potential costs of LSAPs:
• Impair the functioning of securities markets.
• Trading among private agents could dry up, degrading liquidity and price discovery.
• Lead to higher liquidity premiums on Treasury securities.
• Reduce public confidence in the Fed's ability to exit smoothly at the appropriate time.
• Lead to rather aggressive unanchoring of inflation expectations.
• Financial stability
• Driving down yields could lead to stretching on the risk spectrum for yield.
• Fed would incur financial losses
• A loss may add to the federal deficit and debt.
• FOMC has spend considerable effort planning and testing an exit strategy.  They believe they will act decisively at the appropriate time.
• Pg 14 - "We have seen little evidence thus far of unsafe buildups of risk or leverage..."
• "...the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant."
• In the last line of Bernanke's speech he basically says he will conduct additional policy accommodations (ie: whatever non-traditional methods it takes) to strengthen the economy and improve the labor market....within the context of price stability.  Of course earlier on in his speech he did cover himself by saying inflation isn't an issue.

http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.pdf

Fed Injects $600M into the system via repos

Instead of testing their ability to drain liquidity out of the system via reverse repos, the Fed actually injected more liquidity into an already flooded, but clogged system.

Post from Zerohedge:

S&P Above 1400 As Fed Conducts Second $600 Million Repo Following Nearly 4 Year Hiatus

Submitted by Tyler Durden on 08/07/2012 10:15 -0400

• net interest margin
 
• Reverse Repo

Last week we explained why while endless promises of Fed intervention may be enough to confuse the market and force endless rounds of short covering as weak hands are flushed out of positions under threat (but never action) of central planning, banks are no longer in a position to delay indefinitely the moment they have all been waiting for: a $500+ billion reserve injection which will allow them to go hog wild in investing in risk assets or plug capital shortfalls (off the books of course), and otherwise continue their lives in a ZIRP environment which makes net interest margin existence impossible. We also showed that for the first time after nearly 4 years, the Fed conducted a regular (not reverse) repo last Friday. As we explained, regular repos are liquidity injecting, and while the Fed may promise these are merely test runs, everyone knows they are anything but, and are merely a telegraphing to the banks of what is in store. Today, the day after the last repo expired, we just got a new 3 day repo, only not for $210 million this time, but one for $600 million, including not only Treasury, but also Agency and MBS securities. The result: S&P above 1400 for the first time in months.

From the NY Fed:

And this is how the history of the Fed's various repo operations has looked like in the past 4 years.

Sure enough, the S&P just went above 1400 like clockwork.

FOMC Statement Review

No real changes in the statement from the previous release.  Growth is still slow and employment growth will remain stubbornly low.  Interesting that the Fed said the housing sector remains depressed.  The Fed is slowly running out of ammunition.  The scary part is we are may be heading towards even more unconventional monetary policy (see my comments here).

This may foreshadow a weak jobs report for Friday.

Release Date: August 1, 2012

For immediate release

Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant an exceptionally low level of the federal funds rate.

Source: http://www.federalreserve.gov/newsevents/press/monetary/20120801a.htm