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Jan Hatzius Q&A On QE2
Q&A on QE2 (Hatzius), (via Tungstenman Sachs)
Our view remains that the Federal Open Market Committee (FOMC) will once again ease monetary policy via unconventional measures in late 2010 or early 2011. Our views have not changed, and today’s comment discusses them in Q&A form. We believe that purchases of US Treasury securities cumulating to $1 trillion or more are the most likely cornerstone of the program; that the September 21 FOMC meeting is probably too early for a big announcement, but that November 2-3 is a possibility; and that it would likely “work” to a limited degree, perhaps boosting real GDP growth by a little under ½ percentage point per $1 trillion in purchases.
Q: Have you changed your expectations for Fed policy in recent days?
A: No. In early August, we adopted a view that the Federal Open Market Committee (FOMC) would ease monetary policy further via “unconventional” measures. The most likely option, in our view, was a return to a large-scale asset purchase program focused on longer-term US Treasury securities cumulating to at least $1 trillion (see “Climbing Aboard QE2 to Avert a Double Dip?” US Economics Analyst, 10/31, August 6, 2010). At the time, we indicated that the most likely timing for this shift would be late 2010 or early 2011. This remains our expectation.
The rationale for this forecast is that we expect the FOMC’s output and employment forecasts to converge to our own. (This is the conceit inherent in any monetary policy forecast.) Thus, we believe they will move to a view that real GDP will only grow at about a 1½% (annualized) rate through early 2011 and the unemployment rate will rise to 10% by the spring of 2011. If so, they would view growth as clearly below trend according to both the GDP and employment data, and the output gap as widening anew. Given the recession risk that a rising unemployment rate has reliably indicated in the past, we believe that the committee will respond by easing policy further.
Q: What specific measures do you expect?
A: There are two main options, although they are by no means mutually exclusive: (1) large-scale asset purchases and (2) changes in Fed communications. Fed officials believe that these would ease financial conditions via, respectively, a lower “term premium” at the long end of the yield curve and a lower path for the expected level of short-term interest rates. Other options include (3) a lower interest rate on excess reserves, (4) a higher and perhaps more explicit Fed inflation target than the current 2%, (5) setting explicit ceilings on longer-term Treasury yields, to be enforced by promising to buy unlimited amounts, and (6) lending to nonbanks under Section 13 (3) of the Federal Reserve Act, presumably with funding provided by Congress. Chairman Bernanke gave relatively short shrift to measures (3) and (4) in his speech at the 2010 Jackson Hole Symposium, and we likewise regard measures (5) and (6) as unlikely in the absence of another clear recession and/or a renewed financial crisis.
Between options (1) and (2), the FOMC appears to favor renewed asset purchases. We believe that the main reason is that it is difficult to think of a plausible way to strengthen of the commitment beyond the current phrase that “…economic conditions…are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” The next step in terms of the statement itself would be a commitment—at least a conditional one—that the federal funds rate will not rise until a certain date (e.g. mid-2012) or until a certain economic conditions has been met (e.g. core PCE inflation back above 2%). The FOMC is likely to be reluctant to provide such an assurance, although less formal speeches and testimony explaining why the funds rate may need to stay low for a “really extended” period could be used to buttress the impact of any QE2 announcement.
If the primary measure is a return to asset purchases, the question becomes what type of assets Fed officials will decide to buy. We believe that US Treasury securities are the most likely option. This is partly because the Fed already owns a relatively large proportion of the agency MBS market, and partly because many Fed officials (not just the “hawks”) have concerns about interfering with the allocation of credit via buying anything other than Treasury securities. Treasuries have the additional advantage of keeping the Fed’s portfolio as liquid as possible, facilitating the ultimate return to a more normal-sized balance sheet.
Finally, as we discussed in a daily comment last week, there are three potential approaches to reinstituting a Treasury purchase program: (1) a “big bang” announcement of a large number up front, (2) a small announcement with a clear indication that the committee will buy more if economic conditions warrant it, and (3) a fixed monthly or quarterly amount of purchases that continues until certain economic conditions are met. (See Jari Stehn, “Big Bang versus Small Steps: Thoughts on Designing QE2,” US Daily Comment, September 8, 2010.)
Q: Can you be more specific about the timetable for the big QE2 announcement? When will it happen?
A: There are five FOMC meetings between now and the end of the first quarter. A significant announcement at next week’s meeting seems unlikely to us. Given the starting point for the FOMC’s economic forecast—more optimistic on growth and higher on inflation than our own—and the somewhat better-than-expected data over the past few weeks, we do not believe that either of the two criteria spelled out by Bernanke at Jackson Hole—a “deviation from price stability in the downward direction” or a “significant weakening of the economic outlook”—has been met yet.
However, a move could occur at any of the subsequent meetings, but it will very much depend on the data and the implications of the data on the Fed’s forecasts. In particular, a move at the November 2-3 meeting is a possibility if the data warrant it, despite the fact that the FOMC statement will be released less than 24 hours after the polls close for the midterm congressional elections. Historically, there is not much evidence that midterm elections have much impact on the timing of monetary policy announcements, especially on the side of easier policy. For example, the FOMC cut the funds rate by 50 basis points on November 6, 2002, a day after the midterm elections.
Q: Will there be many dissents against a return to unconventional policies?
A: At this point, we don’t think so, especially if the FOMC decides to purchase Treasury securities. We suspect that Kansas City Fed President Hoenig would dissent yet again, but that may well be all. Although a recent article in the Wall Street Journal noted some discomfort with asset purchases even among Washington-based Governors Duke and Warsh, we believe that they would ultimately accept the chairman’s leadership on such an important decision. But of course, all this partly depends on how clear-cut the decision will look in terms of the incoming economic data, and how “proactive” the Fed leadership will want to be in erring on the side of earlier rather than later action. One cost of being more proactive is that it may entail more disagreement.
Q: Will it work?
A: Kind of. Our analysis of the first round of asset purchases announced in late 2008 and early 2009 found that they pushed down 10-year Treasury yields by about 25bp and eased our Goldman Sachs Financial Conditions Index by 80bp per $1 trillion (see Jari Stehn, “Unconventional Fed Policies and Financial Conditions: How Tight a Link?” US Daily Comment, August 17, 2010). In a second round, we believe that the impact on financial conditions would be smaller, mainly because the credit spreads are much tighter than they were back then. If the impact on financial conditions is 50-60bp rather than 80bp, this would imply a potential boost to real GDP growth of a bit under ½ percentage point, using historical rules of thumb. That’s big enough to matter for economic forecasters, but it is hardly enormous.
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hahahahahhahahahh
"...hardly enormous" ....that's what she said!
of course it will work if your a wall street banker. For us "taxpayors"? Nope.
As they will provide the graphs of the results, you can bet your ass it will work.
Will it work?
Of course not. BOJ intervened today. They have 145 Trillion JPY to spend. Thats roughly 1.6 trillion USD, and they didnt blow their whole stash today.
http://www.reuters.com/article/idUSTOE62306R20100304?type=usDollarRpt
The scenario is as follows: So Benny buys a trillion in treasuries. Dollar collapses. BOJ goes fucking apeshit. Buys a trillion USD in the open market, selling JPY. Banks globally are now sat on an extra trillion in JPY. BOJ issues bills, recovers the JPY for issuing short term debt.
Net effect: less tradeable USD debt. JPY more debt. Tokyo pissed, planning to invade Hawaii.
And the net benefit to the US economy is....?
Q: Will it work?
A: Well, yes, for Goldman and its foul kin anyhow. You see, we can dump additional shit assets that we still have marked-to-unicorn on our balance sheet on the criminal Bernanke's balance sheet. All the while, he will send us fresh cash, yes, we understand it's diluted cash, but if we get enough of it it doesn't really matter! Basically, the average person slogging his/her ass off on the street, oh, and their kids, will be fucked by this. But that's ok, because we need to fix the banks so we can lend to Mr. and Mrs. Fucked and family, and enhance their debt slavery. This should enhance the economic recovery, and give us 0.05% GDP growth. Great for Wall St. fucked for the rest of the country. But hey, what do you think we lobby for?????
a. Goldman Sachs marks every one of its assets to market at the end of every day. 100%, no exceptions. This is not the case for WFC, BAC, JPM, C, et al
b. Goldman Sachs does not lend to "Mr and Mrs Fucked", "Mr and Mrs Fat & Happy", or any other consumer
c. US treasuries are not "shit assets" with some unknowable market value. their value is known with great precision in real time
d. (even though your rant did not metnion it) quantitative easing is much ado about almost nothing. the Fed swaps a bank deposit for an interest bearing asset. that actually reduces private sector income, so could even be deflationary if it does not stimulate incremental lending, which it very well may not given that a lack of reserves is hardly the issue today.
the ignorance on ZH is really getting tiresome.
the marginal productivity of debt is negative....the morons in the fed can do all they want while debt bilge pumper in chief barankrupt obama orders the congress to spend spend spend into spendomania oblivion....
every dollar of net debt puts another nail in the gdp coffin...
Ok shorts, Its time to go to sleep. Tomorrow Tyler will comfort us all by telling us they cant do this forever and show us a couple of Photoshop SC5 presentations. My guess is he will tell us its just a matter of time, Just enough time for Dow 36,000.
perhaps boosting real GDP growth by a little under ½ percentage point per $1 trillion in purchases...
Why doesn't the Fed just take the $1 trillion and buy everyone in America an iPad and an HD TV? That will do more for GDP than this dog-and-pony show. Whatta bunch of morons.
I just debased our currency with $1 trillion in UST purchases and all I got was this lousy t-shirt? 1/2% GDP boost per trillion?
Amazing that people want this to happen...
Just default already m'fers...
Add $20Tril and we'll be kickin' some Chinese GDP Ass. Yeah, baby.
1/2 percentage point per $1T. So we just need to buy about $8T a year or so(give or take a few T's). I vote Nixon gets to be on the $1T FRN. Would be symbolic. Maybe FDR can get the $1MM bill.
None of this buying will cause inflation, either. Since you can't eat gold and creating money will never cause inflation as long as they don't physically print it.
It seems the real answer is to buy a quad of debt and get it over with. 500%-ish GDP bump should take care of everything. The math says $1Q and we can send each and every American(and probably even the illegals) about $2.5MM a head. There are going to have to make a bigger Dow hat, obv.
The deflationists will remain correct up until the exact moment they are not. In that exact moment it will be too late to change one's mind. I already have a frame with a $100T Zimbuck. I left a space for the inevitable $100T FRN.
Hyperinflation- It's so simple, it's stupid
"Tungstenman Sachs" ... That's gold, Jerry, gold!
As we all know,each successive stimulus has to be larger than the last,but the effect it has on the economy diminishes each time.
That is why the final "nuclear" printing is so damaging and unecessary,it will achieve nothing but destroy the wealth of generations.Treason is too fine a word to put on it.
As we all know,each successive stimulus has to be larger than the last,but the effect it has on the economy diminishes each time.
That is why the final "nuclear" printing is so damaging and unecessary,it will achieve nothing but destroy the wealth of generations.Treason is too fine a word to put on it.
Softserv
Double dip of Soft Serve, now with dark-chocolate sauce made from 50% pure Hawaiian sugar.
[channelling Ace of Spades] Stock market rallies further beyond its sorry fundamentals due to anticipation of QE2 and HFT, but mostly QE2.
Why won't the Fed officially take over the seats of the incumbents in the White House, Congress and Senate? It would dramatically cut down corruption since all the pipers and shills will be on the street. Hell, for all I know it could also give a small boost to the real GDP with all the freed up lobby funds.
So we've got this problem. And we have these 3 delusional (a psychiatric condition) individuals (Mr. Bernanke, Mr. Geithner & Mr. Summers) who were too stupid to see the problem coming trying to fix it? By giving free money to the stupid bankers who caused the problem? But no free money for the working people who produce their food, clothing, shelter, transportation, energy & health care?
Rots of ruck.
Further to - "By giving free money to the stupid bankers who caused the problem" - by making stupid loans & other dumb bets with OPM & keeping millions of OPM for themselves as bonuses for making the stupid loans & other dumb bets with OPM.
http://www.youtube.com/watch?v=eQAlDJSKJYg&feature=sub
Strikes me as odd that whereas Morgan Stanley has a hissy fit after ZH (historically) posts some of their proprietary research/recommendations - (and proceeds to throw their lawyers at ZH to have them removed)...Goldman has absolutely no problem with ZH's reproduction of what is otherwise client-exclusive (and thus rather pricey) research - being reproduced, free of charge, for the peasant masses, week in, week out..?
Goldman has even gone so far as to send kind requests to ZH to refute/clarify alleged incorrect interpretation of these very papers...
Is it just me..?
Logic dictates a very finite number of reasons for why this could possibly be. And they're both very intriquing.
I've already told you....Tyler and Cramer are the same person (Cramer used to work for GS). You still have not watched the end of the movie?
F*ck yeah! Joe and Betty Sixpack will surely spend more after some additional QE - Spend more on food at three times the cost that is! Stagflation inflated commodities bitchez!
Exactly the same I though when I saw the JPMorgan announcement: http://www.zerohedge.com/article/morgan-stanley-expects-qe2-announcement-next-week-takes-other-side-goldmans-variance-swap-tr#comment-580132
I can see Zoolander explaining all this
http://tallskinnykiwi.typepad.com/tallskinnykiwi/zoolander_face.jpg
....may need to stay low for a “really extended” period could be used to buttress the impact of any QE2 announcement.
Q: Will it work?
A: Kind of.
...boosting real GDP growth by a little under ½ percentage point per $1 trillion in purchases
For every trillion dollars of QE you get a free 0.5% GDP, good for a limited time only
Keeping interest lates at 0% is great. But economic growth requires end demand and good paying jobs. Food stamps (debit cards), unemployment checks, and other forms of cash assistance from the Goberment doesn't lead to growth.
3 ways to foster growth by giving people more disposable income:
1) Hire them as goberment workers at 73K per year with benefits
2) Cut taxes to leave more money in the pockets of those who do pay taxes
3) Create a business friendly enviroment to foster job creation
All this quantitative easing crap and 0% interest rates also deprives savers of interest income, as well as all those who depend on interest income like insurance companies, banks, and pension funds.
I say, raise interest rates to 5%. That won't kill anyone. Credit card rates even for the best risks are 18%. The problem is that the goberment won't be able to pay it's interest on the debt if interest rates go up. The US is in the death spiral of debt.
QE2 is the beginning of the endgame. Inflation rising past five is the final stage of the endgame, when the king is put back into check every move. Broad selling of Treasuries is mate.
http://keynesianfailure.wordpress.com/2010/09/10/delayed-deleveraging-meets-the-keynesian-endpoint/
Maybe they will recant this in another month or two.
"via Tungstenman Sachs"
Always good to start the morning with a laugh. Thanks, TD.
I found lots of interesting information here. I love zerohedge.
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