Is Jackson Hole's 'Agenda-Less' Agenda To Taper Treasuries Before MBS?
There is still no official public schedule for the Kansas City Fed's annual Jackson Hole Economic Symposium, anticipated to begin on Thursday. However, as we noted previously, the schedule will not include a keynote address from a high-ranking Federal Reserve official. Furthermore, as Goldman notes, in contrast to tradition, Chairman Bernanke will not be in attendance (Yellen will but Summer won't). However, Jackson Hole has historically been an event where the latest thinking on monetary policy has been debated by academics and central bankers, and this year will be no different. Perhaps, Goldman points out, most interestingly, some of the research to be presented finds that MBS purchases had a disproportionate effect on depressing MBS yields, while Treasury purchases did not seem to have a similar benefit - perhaps hinting at the form the 'taper' will take.
Via Goldman Sachs,
Jackson Hole unlikely to provide much guidance on near-term Fed policy
There is still no official public schedule for the Kansas City Fed's annual Jackson Hole Economic Symposium, anticipated to begin on Thursday. However, media sources widely report that the schedule will not include a keynote address from a high-ranking Federal Reserve official. In contrast to tradition, Chairman Bernanke will not be in attendance. At the last post-FOMC press conference he simply noted that "I think it's not inappropriate to go to different conferences." Vice Chair Janet Yellen will reportedly be moderating a panel discussion rather than addressing attendees. ECB President Mario Draghi and BoE Governor Carney will not attend, but BoJ Governor Kuroda will. Lawrence Summers one of the leading candidates to replace Bernanke along with Janet Yellen is also not expected to go. As a result, we anticipate little by way of market-moving headlines to come out of Jackson Hole this year.
However, Jackson Hole has historically been an event where the latest thinking on monetary policy has been debated by academics and central bankers, and this year will be no different. For example, at last year's conference Michael Woodford (Columbia University) presented a technical paper which suggested potentially greater efficacy of forward guidance compared with QE purchases. This paper ended up being on the leading edge of a general shift in thinking on the relative merits of forward guidance vs. QE, which we have outlined in more detail recently. It is likely that the QE vs. forward guidance debate will continue to be a hot topic at this year's conference.
While much of the focus this year will be on international dimensions of monetary policy, some papers will probably be directly relevant for the US monetary policy debate. Arvind Krishnamurthy (Northwestern University) is expected to present on "the Transmission of Unconventional Monetary Policy" on Friday morning. Past work by Krishnamurthy with Annette Vissing-Jorgensen found that QE1 and QE2 had large effects on highly-rated longer-term fixed income security prices, emphasizing two particular transmission channels: conventional rate path signaling and influencing the relative scarcity of safe assets.
Perhaps more interestingly, they also found that MBS purchases had a disproportionate effect on depressing MBS yields, while Treasury purchases did not seem to have a similar benefit. This analysis was consistent with (and may have partly informed) past remarks from Fed Governor Stein, and Presidents Rosengren and Williams, who stated that MBS purchases may have more "bang for the buck" than Treasury purchases. General consensus on this point could reflect on the probability of disproportionate tapering of Treasury securities rather than MBS when the time comes. We think this is likely. A shift in academic sentiment in the other direction would be equally notable.
Previous summary thoughts from Goldman Sachs on "The case for tapering Treasuries before mortgages"
QE tapering is in focus, especially in the agency MBS market
The fear of QE tapering led to a rates selloff in recent weeks. During this selloff, mortgages underperformed Treasuries. Survey evidence suggests that market participants may be expecting mortgage QE to end earlier than Treasury QE. In that case, any future indication of QE tapering and exiting may impact the agency MBS market more than the Treasury market.
There are reasons to keep mortgage QE longer than Treasury QE
Residential mortgage lending standards remain very tight compared with notable easing in credit availability for C&I loans and commercial real estate loans. Many borrowers have yet to take advantage of the historically low interest rate by refinancing. Several Fed officials have expressed views that MBS purchases are more effective in supporting the economy than Treasury purchases. Purchasing mortgages may be politically more palatable than purchasing Treasuries. Mortgages are prepaid when borrowers refinance, move, or default, which can be helpful if the Fed does not want to sell MBS while unwinding its balance sheet.
But there are also reasons to taper mortgages sooner
The benefits of mortgage QE do not come without costs. Because of the low net issuance of agency MBS compared to Treasuries, large scale purchases by the Fed could strain normal MBS mortgage market functioning. Housing has been recovering over the past year and continued stimulus may raise concerns about overheating in certain markets. Some Fed officials prefer Treasury purchases over MBS purchases because the latter allocate credit to a specific sector of the economy. Overall, we think the benefits of keeping mortgage QE longer than Treasury QE outweigh the costs. But it is difficult to have strong conviction in the call and the risks of extending mortgage purchases longer than Treasury purchases need to be monitored closely.
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