Aside from the fact that low short term nominal interest rates are a sign that money has been tight, and the fact that short nominal rates have been near zero for nearly six years, indicative that money has been tight for at least that long, there has been plenty of buzz in markets news lately about how the Fed will exit “record” stimulus. I suppose whether it has been record stimulus is in the mind of the beholder.
Though I would like to link to the most interesting video I’ve seen that discusses the particulars of the “exit” strategy, I cannot because it was published on the Wall Street Journal Apple TV app. The anchors were discussing a report released to them of the under the covers strategy that I found interesting. The outline is something like this:
- The overnight rate, known as the Federal Funds rate, is obsolete to be replaced by the reverse-repo rate.
- IoER will be phased out over a few years (I think they said 5 years)
- Proceeds from MBS purchased via QE will continue to be reinvested
- Balance sheet reduction will be conducted over 60 years (no, 60 is NOT a typo)
- The inflation target will be thought of in a range rather than an exact target
There may have been more discussed, but my brain homed-in in on these few points and I just blocked everything else out. For at least a year I’ve been feeling uneasy about what the Fed would do in the near future concerning the hype about the size of the balance sheet, as undue as it is. Getting rid of IoER and scheduling balance sheet reduction to be complete in 60 years is, well, is quite unexpectedly dove-ish. Though, because the devil is always in the details, I want to see what they’re going to do with that reverse-repo before I get too excited. And 60 years is a very long time to bind future Feds.
Other observations about the buzz around the September meeting are:
There is a stark contrast between Bernanke, who more than once repeated that price stability trumps employment any day of week no matter the circumstances, and Yellen whose news conference was one-third to one-half about employment. The Bernanke Fed put the unemployment rate in the spotlight when pressured to talk about it, while Yellen talks about full employment voluntarily – different!
I don’t have anything solid to back up what I think I see happening, but it appears more to me that, just as Bernanke stealthily implemented explicit inflation targeting with emphasis on headline PCE long before it was announced, Yellen is trying to put policy back the way it was before Bernanke. And I don’t mean that in terms of the interest rate peg. That’s gone, and I think she knows it. Which, if there is anything to it, is a very good thing. The first step in solving a problem is admitting that there is one.
PS: While I don’t want to get ahead of the Fed (those FOMC members can be real slippery suckers), if my ‘gut’ feeling is anywhere close to reality, my main mission of trying to put as many nails as possible in the coffin of hard core inflation targeting, at least in the US, will be at least partially satisfied.
It’s sort of interesting that after the Fed’s statement was released, the 10-yr TIPS spread declined by almost forty basis points while the 5-yr spread rose by twenty. There are lots of ways to interpret that. But because I’m like everyone else who sees what they want to see, I think Yellen is on her way to pulling that “maybe some day we’ll be happy again” a lot closer to the present. I hope she keeps it up. But I need to figure out what that means for me.
One of my favorite older movies is The Big Red 1. It’s a WWII flick that starts off with the signing of the Treaty of Versailles, the peace treaty for the Great War (WWI). It then cuts away to a lone American sergeant on a battle filed in France. A German soldier approaches him with a paper in his hand declaring in German that there is peace. Of course the sergeant doesn’t speak German and he stabs the German soldier to death. Once done, he picks up that paper to learn that on it is a news report that a treaty had been signed.
A declaration of peace is really, I think, a state of mind. Given everything I’ve been though, I’m not quite there yet, being able to have the Great Recession just sort of fade away. I probably wouldn’t, as in the Big Red 1, just figuratively jump a stray inflation nutter trying to spread peace, if there is even one with such personal fortitude to do so. But I am not entirely sure he or she won’t be mercilessly harassed if, for no other reason, than personal satisfaction. Maybe an uneasy truce is better for now. I’ll agree to peace when I’m no longer stuck in a job I don’t really like and can finally replace my heat pump.